If the good is non storable (milk), an increase in the expected future price ( P ex ) will also shift the supply curve to the right (an increase in supply). If the good is storable (oil), an increase in the expected future price (( P ex ) will shift the supply curve to the left (a decrease in supply. See below) Thus , the impact of change in P ex on supply depends on the good’s storability. Market Equilibrium Market equilibrium occurs at the intersection of market supply and demand (Q S = Q D ) (Non Storable) P S 1 S 2 Q S Storable P S 2 S 1 Q S 14
Fig. 3.6: Equilibrium price and quantity shortage = 47 (Prices should be multiplied by 10 to be consistent with previous tables) If Q S > Q D , there is a market surplus= Q S - Q D . Ex. If P =$50, then 148-5 =143 units. If Q S < Q D , there is a market shortage =Q S -Q D . Ex. If P =$15, then 20-47= -27 units . If Q S = Q D , there is a market equilibrium = Q S - D D = 0 or 39 – 39 = 0 units . (In this graph, the equilibrium price is P e = $20 and equilibrium Q e = 39 units) Another example : Suppose Q D = 10 – 2 P Q S = 4 + P Calculate equilibrium price ( P e ) and equilibrium quantity ( Q e ). (Answer: P e = $2 and Q e = 6 units). 15
Changes in Equilibrium (within Supply/Demand framework ): If there is a change in one of the “other determinants” of supply or demand, there will be a change in market equilibrium position . Suppose there is an i ncrease in taste, or income for a normal good, or prices of substitutes or expected price. Then the market demand will shift up, leading to a new intersection or equilibrium with the given supply. Fig 3.7: Changes in Equilibrium Both equilibrium quantity and price increase. MARKET (DIS)EQUILIBRIUM There are two types of market dis-equilibrium (shortage or surplus): Price controls (shortages) and Price floors (surpluses). Price Control or Ceiling ( shortages ) : Government’s intervention prevents the market price from moving up to clear the market and achieve equilibrium. Thus, P C < P e ; where P C is the ceiling price. P c < P e . Sometimes businesses impose price ceilings (Figure: Price ceiling) 16 P e P C Shortage Q D Q S C Q e Q D C S P
Price controls such as rent controls lead to shortages because the controlled price is too low. Total shortages = Q C D – Q C S = apartments? If these are apartments, then the total shortage can be divided into two parts: Q e - Q C S = # of existing apartments that are taken out of the market. Q C D – Q e = # of new apartments that are sought by new renters. Shortages will need a rationing mechanism . (1) First come , first served; (2) California’s government and gasoline rationing in 1979; (3) sports team and preferred customers with season tickets at times of playoffs. For more information on ceilings see: How Do Businesses Deal with Losses Created by Price Ceilings? Price ceilings (or lowered prices) provide a gain for buyers and a loss for sellers .