Microeconomics – Equilibrium

- When consumers and producers interact with each other, the market balances the desires of the buyers with the desires of the sellers.
•In equilibrium the quantity demanded is equal to the quantity supplied; Qd = Qs.
•In equilibrium the number of exchanges made is maximized.

1. Consumers need information about different supplier's prices so they can choose the lowest price.
2. Firms must be able to monitor their inventories.
3. Firms must be able to change the price of their product to adjust it toward the equilibrium price.

- When a market is in equilibrium, the price that consumers pay and the price that producers receive exactly balances the marginal benefit and marginal cost of consuming and producing a product.

- exists when the quantity supplied is bigger than the quantity demanded at a given price: Qs > Qd.
- a surplus means that the price must fall to reach the equilibrium price

- exists when the quantity demanded is bigger than the quantity supplied at a given price; Qd > Qs
- a shortage means that the price must rise to reach the equilibrium price

- When a market is not in equilibrium, either too much or too little is being produced.
- Notice that when price is too high, there is a surplus and when price is too low, there is a shortage.
•A surplus means that price must fall to reach the equilibrium price.
•A shortage means that the price must rise to reach the equilibrium price.
•In equilibrium, there is no need for price to change.

- An increase in demand will increase both the price and the quantity.
- a decrease in demand will decrease both the pride and quantity

- an increase in supply will decrease the price and increase the quantity
- a decrease in supply will increase the price

- a minimum allowable price that is typically set above the equilibrium price.
•Price floors are designed to benefit the producers of goods and services.
•Government imposes price floors because they have some social goal that they want to achieve.
- A price floor that is set above the equilibrium price will create a surplus in the market.
- At the price floor, consumers will buy Q1 units of the product and producers will make Q2 units.
•Since Q2 is bigger than Q1 there is a surplus.
•The market would adjust to a surplus by lowering the price.
•The price floor prevents the price from falling to the equilibrium price.
- Consider the effects of the price floor.
•Consumers will only purchase Q1 units instead of Qe units and will have to pay a higher price for those units.
•Producers will get a higher price, but can only sell Q1 units, leaving an excess of (Q2-Q1).
•Governments usually spend large amounts of money to eliminate the surplus by either buying it up or paying producers not to produce.
- Finally, note that a price floor set below the equilibrium price will have no effect.

- is a maximum allowable price that is typically set below the equilibrium price.
•Price ceilings are designed to benefit the consumers of goods and services.
•Government imposes price ceilings because they have some social goal that they want to achieve.
- A price ceiling that is set below the equilibrium price will create a shortage in the market.
- At the price ceiling, producers will make Q1 units of the product and consumers will want Q2 units.
•Since Q2 is bigger than Q1 there is a shortage.
•The market would adjust to a shortage by raising the price.
•The price ceiling prevents the price from rising to the equilibrium price.
- Consider the effects of the price ceiling.
• At the price ceiling the consumers want Q2 units, but can only obtain Q1 units; there is a shortage equal to (Q2-Q1).
•Producers will only sell Q1 units and they get a lower price for those.
•Consumers will only be able to purchase Q1 units instead of the Qe units they could have had at Pe
- Finally, note that a price ceiling set above the equilibrium price will have no effect.

- excise or specific tax is based on the number of units produced or sold
- An excise tax on the producers of a good will reduce the supply of that good.
- An excise tax on the consumers of a good will reduce the demand for that good.

- based on the amount paid or earned

Raises the price that consumers pay
•Reduces the price that producers receive
•Reduces the quantity sold in the market
•Generates tax revenues equal to the tax (t) times the quantity sold.
*Tax Revenue = t x Q

Raises the price that consumers pay
•Reduces the price that producers receive
•Reduces the quantity sold in the market
•Generates tax revenues equal to the tax (t) times the quantity sold.
*Tax Revenue = t x Q