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Price of
Ice-Cream
Cone Supply
Equilibrium Demand
quantity
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning
Figure 9 Markets Not in Equilibrium
2.00
Demand
0 4 7 10 Quantity of
Quantity Quantity Ice-Cream
demanded supplied Cones
Equilibrium
• Surplus
• When price > equilibrium price, then quantity
supplied > quantity demanded.
• There is excess supply or a surplus.
• Suppliers will lower the price to increase sales, thereby
moving toward equilibrium.
Equilibrium
• Shortage
• When price < equilibrium price, then quantity
demanded > the quantity supplied.
• There is excess demand or a shortage.
• Suppliers will raise the price due to too many buyers
chasing too few goods, thereby moving toward
equilibrium.
Figure 9 Markets Not in Equilibrium
$2.00
1.50
Shortage
Demand
0 4 7 10 Quantity of
Quantity Quantity Ice-Cream
supplied demanded Cones
Equilibrium
Supply
2.00
2. . . . resulting
Initial
in a higher equilibrium
price . . .
D
0 7 10 Quantity of
3. . . . and a higher Ice-Cream Cones
quantity sold.
Three Steps to Analyzing Changes in
Equilibrium
• Shifts in Curves versus Movements along
Curves
• A shift in the supply curve is called a change in
supply.
• A movement along a fixed supply curve is called a
change in quantity supplied.
• A shift in the demand curve is called a change in
demand.
• A movement along a fixed demand curve is called a
change in quantity demanded.
Figure 11 How a Decrease in Supply Affects the
Equilibrium
Price of
Ice-Cream 1. An increase in the
Cone price of sugar reduces
the supply of ice cream. . .
S2
S1
New
$2.50 equilibrium
2. . . . resulting
in a higher
price of ice
cream . . . Demand
0 4 7 Quantity of
3. . . . and a lower Ice-Cream Cones
quantity sold.
Table 4 What Happens to Price and Quantity When Supply
or Demand Shifts?
SURPLUS
PRODUSEN
DAN
KONSUMEN
CONSUMER SURPLUS
Consumer
surplus
P1
B C
Demand
0 Q1 Quantity
Figure How the Price Affects Consumer Surplus
Initial
consumer
surplus
C Consumer surplus
P1
B to new consumers
F
P2
D E
Additional consumer Demand
surplus to initial
consumers
0 Q1 Q2 Quantity
PRODUCER SURPLUS
• Producer surplus is the amount a seller is paid
for a good minus the seller’s cost.
• It measures the benefit to sellers participating in
a market.
Figure How the Price Affects Producer Surplus
Price
Supply
B
P1
C
Producer
surplus
0 Q1 Quantity
Figure How the Price Affects Producer Surplus
Price
Additional producer Supply
surplus to initial
producers
D E
P2 F
B
P1
Initial C
Producer surplus
producer to new producers
surplus
0 Q1 Q2 Quantity
MARKET EFFICIENCY
• Consumer surplus and producer surplus may be
used to address the following question:
and
Producer Surplus
= Amount received by sellers – Cost to sellers
MARKET EFFICIENCY
Total surplus
= Consumer surplus + Producer surplus
or
Total surplus
= Value to buyers – Cost to sellers
MARKET EFFICIENCY
• Efficiency is the property of a resource
allocation of maximizing the total surplus
received by all members of society.
MARKET EFFICIENCY
• In addition to market efficiency, a social
planner might also care about equity – the
fairness of the distribution of well-being among
the various buyers and sellers.
Figure 7 Consumer and Producer Surplus in the Market
Equilibrium
Price A
D
Supply
Consumer
surplus
Equilibrium E
price
Producer
surplus
Demand
B
0 Equilibrium Quantity
quantity
MARKET EFFICIENCY
• Three Insights Concerning Market Outcomes
• Free markets allocate the supply of goods to the
buyers who value them most highly, as measured by
their willingness to pay.
• Free markets allocate the demand for goods to the
sellers who can produce them at least cost.
• Free markets produce the quantity of goods that
maximizes the sum of consumer and producer
surplus.
Figure 8 The Efficiency of the Equilibrium Quantity
Price
Supply
Value Cost
to to
buyers sellers
Cost Value
to to
sellers buyers Demand
0 Equilibrium Quantity
quantity
• Market Power
• If a market system is not perfectly competitive,
market power may result.
• Market power is the ability to influence prices.
• Market power can cause markets to be inefficient because
it keeps price and quantity from the equilibrium of supply
and demand.
Evaluating the Market Equilibrium
• Externalities
• created when a market outcome affects individuals
other than buyers and sellers in that market.
• cause welfare in a market to depend on more than
just the value to the buyers and cost to the sellers.
• When buyers and sellers do not take
externalities into account when deciding how
much to consume and produce, the equilibrium
in the market can be inefficient.