ECON 203 Lecture 6 Outline of Last Lecture I Main Ideas II Total Cost III Marginal Cost Outline of Current Lecture I Main Ideas II Excess Demand Excess Supply Shortage Surplus effects on Markets III How Why Markets Shift and the Results Current Lecture Main Ideas In a PCM perfectly competitive market suppliers and demanders can t change price price is set through interaction between suppliers and demanders who determine ultimately determine a price using the laws of supply and demand where both parties are satisfied equilibrium Markets are the mechanism the parties use to determine a price Markets are used to find the equilibrium point through the interaction of buyers and sellers summary of above statement Equilibrium Points are the equivalent of points on the line curve of a PPC possibility production curve When a Market has reached an Equilibrium Point there is no inherent reason for it to shift the Market won t change without outside force Shift Variables When a Market is in Disequilibrium it will inherently change over time through the interaction of buyers and sellers until equilibrium is reached Shift Variables only affect the time it takes to reach equilibrium unless there is a fixed shift variable Excess Demand Excess Supply Shortage Surplus effects on Markets D S P This area shows excess demand shortage of goods the advantage is to the sellers S1 D1 P1 Q This graph represents a market in disequilibrium since there is a shortage excess demand Disequilibrium A situation in a Market where the supply and demand are not at the equilibrium point the market is subject to change where the supply and demand curves move left or right in order to meet the point these markets are not stable not running at max efficiency In a Market with excess demand the Supplier has pricing power he can raise the price and still sell all units over time the supply and price will increase while demand decreases until they reach the equilibrium point In pure capitalism free market the point will naturally be found However for example in Russia command and control a certain price is set for a good the price is low so the demand is high the problem is since the market price is so low the supply is also low since the marginal cost will exceed the selling price faster less units are produced While the good is very affordable people waste time trying to attain it which is an example of issue when there is a shortage excess demand since the price is set the suppliers don t want to increase production and the market is not allowed to adjust creating a permanent excess in demand P D Excess Supply S Surplus D1 S1 Advantage to the Buyer P1 Q Surplus Markets are Buyer s Market opposite of shortage this is where they buyer has pricing power supply and price will decrease and demand will increase until equilibrium point How Why Markets Shift and the Results When Inputs change the MC Marginal Cost Curve will shift left or right based on whether or not the Inputs increase efficiency decrease production cost right or decrease efficiency increase production cost left We analyze Markets in their Dynamic State Perfectly Competitive Market In the real world however there are constant changes to Markets from all of the Shift Variables Income Taste Price of Related Goods Substitutes and Complementary Expectation and Technology In the real world changes in supply and demand create disequilibrium the Market then adjusts Supply and Demand curves shift left and right in order to find a new equilibrium point and establish a price Free Markets naturally get rid of Disequilibrium Overtime every Market changes with the Market Demand Supply shifting left or right based on changing variables in order to find the equilibrium point An extreme example is seasonal goods such as Candy Canes D1 D2 S P Candy Cane Market September D1 vs December D2 EQ2 EQ1 Q In this example for the Market of Candy Canes there is a shift in the demand D1 to the right D2 increase in demand because of the fact that in December your tastes change shift variable and you now have a greater desire taste for candy canes However the Market Supply S is constant creating a shortage excess demand of the good the Market then reacts to the new demand D2 by increasing the amount supplied and the price in order to find a new equilibrium point EQ2 DL SL Excess Supply of Labor QL hours Wage 7 55 Unemployment In this example the graph shows the labor market in the US DL is demand for labor and SL is labor supply In the US the minimum wage is 7 55 so the wage price can t go lower than that point At 7 55 more people want to work than needed by the company Since the Market can t adjust to find an equilibrium point max efficiency everyone employed unemployment results