PRICE DETERMINATION IN MARKETSEQUILIBRIUM PRICE DEFINEDPowerPoint PresentationExcess supply = Qs - QDExcess demand = QD - QSSlide 6Slide 7Slide 8Slide 9How can the price of tacos change?Slide 12Slide 14Slide 15Slide 17Nachos and beer are complements. The price of beer rises. What is the effect on the market for nachos?People come to believe that eating apples is good for them. The more apples they eat, the more likely they are to stay well. What is the effect on the market for apples?Classes at universities are produced using faculty labor services, and other inputs like buildings and computers. The faculty salaries increase by 10%. What is the effect on tuition and enrollment at universities?MSU agricultural scientists develop a new strain of corn that increases yields by about 15%. What is the effect of the improvement in technology on the market for corn?THE MARKET FOR MEDICAL CARE IS IN EQUILIBRIUM, AND CONSUMERS’ INCOMES INCREASE. WHAT IS THE EFFECT ON MARKET PRICE?SUPPLY/DEMAND SUMMARYMarkets slide 1PRICE DETERMINATION IN MARKETSThe market demand curve shows the amount demanded at every price.The market supply curve shows the amount supplied at every price.The question now is whether there is some price at which the quantities supplied and demanded are the same.Markets slide 2EQUILIBRIUM PRICE DEFINEDThe equilibrium price of a good is:a price at which quantity supplied equals quantity demanded.a price at which excess demand equals zero.At the equilibrium price there is no net tendency for price to change.Markets slide 3Excess demand exists when, at the current price, the quantity demanded is greater than quantity supplied.Excess supply exists when, at the current price, the quantity supplied is greater than the quantity demanded.Markets slide 4Excess supply = Qs - QD Market for tacossupplydemandpricequantityp = $3QDQSEXCESS SUPPLYEXCESS SUPPLYMarkets slide 5Excess demand = QD - QSMarket for tacossupplydemandpricequantityp = $1QDQSEXCESS DEMANDEXCESS DEMANDMarkets slide 6When there is EXCESS DEMAND for a good, price will tend to rise.When there is EXCESS SUPPLY of a good, price will tend to fall.Markets slide 7When excess demand equals zero, price must be the equilibrium price, and we say the market is in equilibrium.If you want to find out the price at which a market is in equilibrium, then look for the price where the excess demand is zero.Markets slide 8Economists are interested in the explaining equilibrium prices.In particular, they are anxious to explain why equilibrium prices change.Markets slide 9What is the equilibrium price in the market for tacos? Show it on the diagram. What is the equilibrium quantity of tacos?p = $2PQsupplydemandTACO MARKET$1$3$4Go to hidden slideMarkets slide 11How can the price of tacos change?Only if there is a change in supply, or if there is a change in demand.But remember, we already know the list of reasons why supply and demand can change.Markets slide 12Changes in demand can be caused by:Changes in supply can be caused by:Go to hidden slideMarkets slide 14The following is a series of sample problems showing changes in the equilibrium prices of some goods.Markets slide 15PQp0q0Classes at Lansing Community College are an inferior good. People’s incomes fall, perhaps due to a recession. What is the effect on LCC tuition and enrollment?supplydemand @ high incomeLCC ENROLLMENTGo to hidden slideMarkets slide 17THE MARKET FOR APARTMENTS IN EAST LANSING IS IN EQUILIBRIUM, AND MSU RAISES THE PRICE OF DORM ROOMS. WHAT IS THE EFFECT ON THE MARKET FOR APARTMENTS IN EAST LANSING?PQp0q0supplydemandE.L. APARTMENTSGo to hidden slideMarkets slide 19Nachos and beer are complements. The price of beer rises. What is the effect on the market for nachos?PQp0q0supplydemand @ old beer priceNACHO MARKETGo to hidden slideMarkets slide 21People come to believe that eating apples is good for them. The more apples they eat, the more likely they are to stay well. What is the effect on the market for apples?PQp0q0APPLE MARKETsupplydemandGo to hidden slideMarkets slide 23p(tuition)Qp0q0Enrollmentsupply at original wagedemandClasses at universities are produced using faculty labor services, and other inputs like buildings and computers. The faculty salaries increase by 10%. What is the effect on tuition and enrollment at universities?Go to hidden slideMarkets slide 25MSU agricultural scientists develop a new strain of corn that increases yields by about 15%. What is the effect of the improvement in technology on the market for corn?PQp0q0CORN MARKETdemandsupplyGo to hidden slideMarkets slide 27THE MARKET FOR MEDICAL CARE IS IN EQUILIBRIUM, AND CONSUMERS’ INCOMES INCREASE. WHAT IS THE EFFECT ON MARKET PRICE?p0Q0supplyD at lower incomePQMEDICAL CARE MARKETGo to hidden slideMarkets slide 29SUPPLY/DEMAND SUMMARYMarket price serves as the adjustment mechanism to move markets to equilibrium.Price changes in response to the existence of excess demand or excess supply.Changes in demand and changes in supply lead to changes in equilibrium prices and