The document discusses key economic concepts related to supply and demand, including: 1) Relative scarcity is determined by the relationship between supply and demand and is accurately measured by price. 2) The laws of supply and demand explain how quantity and price move in relation to each other. 3) An equilibrium price exists where quantity supplied equals quantity demanded, representing efficient allocation of resources. Price controls can create shortages or surpluses and distort market incentives.

1. More on Markets
Considering Equilibrium and
Equilibrium’s Interactions with
DEMAND & SUPPLY
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2. Relative Scarcity
 How scarce is one good or service compared
to all other goods and services?
 Relative scarcity is the relationship between
SUPPLY and DEMAND.
 Price represents the measurement of relative
scarcity.
 What determines the price of a work of art, or
an antique, or an old stamp or coin?
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3. What is an Equilibrium Price?
 The measure of relative scarcity.
 Relative scarcity is the relation between
SUPPLY and DEMAND.
 How scarce is one product compared to
all others?
 The unit of measurement is the price in
the domestic currency. (e.g. $43.37)
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4. Relative Prices: the Why?
Diamond
$50,000
Insulin $5
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5. Price: as the Indicator of Relative Scarcity
$
$
$
how many units on the Scarcometer?
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6. Order these Products on the
basis of Relative Scarcity
 yacht
 candy bar
 nice dinner for two in San Francisco
 mini truck
 laptop computer
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7. Order these Products on the
basis of Relative Scarcity
1 yacht
5 candy bar
4 nice dinner for two in San Francisco
2 mini truck
3 laptop computer
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8. the Equilibrium Price as
the Measure of Relative Scarcity
 Feet and inches measure distance.
 Pounds and ounces measure weight.
 Degrees Fahrenheit measure heat.
 Cups and pints and quarts measure volume.
 Dollars and cents measure relative scarcity in the
U.S. economy.
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9. Relative Scarcity
 is NOT the same as rare
 Rare tropical disease is not scarce (no
DEMAND ).
 Gold is more scarce than water even though
water is essential for life. (the SUPPLY of water
is greater than the SUPPLY of gold.)
 Some collectors’ items are more scarce than
others depending upon SUPPLY & DEMAND .
Their prices go up or down depending upon
changes in SUPPLY & DEMAND .
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10. Relative Scarcity
 Relative scarcity is not a subjective evaluation of
worth or value or social contribution although some
of those considerations may be included in the
DEMAND function.
 To the extent someone can manipulate SUPPLY or
DEMAND they may be able to influence relative
scarcity and thus the price ~ but price remains the
ultimate measurement of relative scarcity.
 OPEC
 Advertising
 In a market with CIIP, price is the accurate measure
of the relative scarcity of a good or service.
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11. Relative Scarcity
 is the relationship existing between
SUPPLY and DEMAND.
 is measured by the Equilibrium Price
 is not the same as rare
 is not a matter of SUPPLY alone
 Is neither “fair” nor “unfair”
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12. The Law of Supply
 Once all “other factors” have been considered, the
quantity supplied of a good or service varies directly
with the price of the good or service; so if price goes
up then quantity supplied goes up.
 The influence of price on quantity supplied is a short
run phenomenon and assumes no change in “other
factors”.
 The Principle of Exchange – if the price received
by the supplier is greater than all production costs
the supplier will SUPPLY the product.
 Price is an incentive to suppliers
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13. Diminishing Marginal Returns
 Given some fixed inputs, additions of the variable
inputs will yield lower additional products.
 Since each of the variable inputs are paid the
same, marginal costs increase as production
increases.
 Marginal resource costs rise as production
increases.
 Therefore, suppliers must receive a higher price to
supply a greater quantity, assuming no change in
“other factors”.
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14. Price Elasticity of SUPPLY
 Measures the strength of sellers’ reactions to a
price change.
 How much will quantity supplied change as a result
of a price change?
 Depends upon suppliers’ ability to increase or
decrease production in the short run.
 How flexible are the resources used in production?
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15. The Law of Demand
 Once all other factors have been considered, the
quantity demanded of a good or service varies
inversely with the price of the good or service.
 Price rises, quantity demanded falls; price falls,
quantity demanded rises.
 The Principle of Exchange – if the price asked is
greater than the expected benefit, the demander will
not buy the product; if the price asked is less than the
expected benefit, the demander will buy the product.
Price is a disincentive to buyers.
 Higher prices send buyers in search of substitutes.
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16. Diminishing Marginal Utility
and DEMAND
 Utility is the benefit consumers get from
consuming goods and services
 As consumers consume more of a product, the
additional utility from additional units of the
product decreases – the Law of Diminishing
Marginal Utility
 To entice buyers to buy more as their marginal
utility falls the price must also fall thereby
making the price lower than the expected
benefit. (the Principle of Exchange )
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17. Price Elasticity of DEMAND
 Measures the strength of buyers’
reactions to a price change.
 How much will quantity demanded
change as a result of a price change?
 Depends upon
 availability of substitutes
 Percentage of total expenditures
 time
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18. Allocative Efficiency
 At the equilibrium price the marginal utility of
consuming the product is equal to the marginal
resource cost of producing the product.
 From society’s perspective this is the optimal
resource allocation to this particular activity
 Attempts to change the price of a product through
regulation will distort incentives and cause some
amount of resource misallocation.
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19. @ a Price Above Equilibrium
 If a price is set above equilibrium, a surplus
exists. (wherein the quantity supplied is greater
than the quantity demanded at the higher price.)
 Without artificial barriers to restrain “adjustment”
the price will begin to fall towards equilibrium
 As price falls the quantity supplied will decrease
and quantity demanded will increase.
 Eventually the price will fall to the equilibrium
price where quantity supplied is equal to quantity
demanded and the quantity exchanged.
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20. @ a Price Below Equilibrium
 If a price is set below equilibrium, a shortage
exists. (wherein the quantity demanded is greater
than the quantity supplied at the lower price.)
 Without artificial barriers to restrain “adjustment”
the price will begin to rise towards equilibrium
 As price rises the quantity demanded will decrease
and quantity supplied will increase.
 Eventually the price will rise to the equilibrium
price where quantity demanded is equal to
quantity supplied and the quantity exchanged.
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21. Surplus versus Shortage
 Surplus: at a price set above equilibrium the quantity
supplied is greater than the quantity demanded.
 Shortage: at a price set below equilibrium the
quantity demanded is greater than the quantity
supplied.
 Surpluses and shortages are always in reference to
specific non-equilibrium prices.
 They will be automatically eliminated by price changes
if there are no barriers to price movements.
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22. Price Floors & Price Ceilings
 A legislated price
 A price floor is a minimum price. Prices can be
higher but not lower than a floor (minimum
“rent”). If the floor is set above the equilibrium a
surplus is created.
 A price ceiling is a maximum price. Prices can
be lower but not higher than a ceiling (re: rent
controls). If the ceiling is set below the
equilibrium a shortage is created.
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23. Price Floors & Price Ceilings
Price cannot fall below a floor
Price cannot rise above a ceiling
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24.  Who gains?
 Politicians
 Those who get the goods and services
 Those who police the ceiling
 Who loses?
 Those who supply the good or service
 Those who can’t get the good or service
 Taxpayers
a Price Ceiling = shortage
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25. a Price Floor = surplus
 Who gains?
 Politicians
 Those who supply the goods and services
 Those who police the floor
 Those who store the surplus
 Who loses?
 Those who demand the good or service
 Taxpayers
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26. Price Controls - the Message
 Price Controls distort market incentives
 Price Controls can not change the relative
scarcity of the product
 Price Controls cause over allocation or under
allocation of resources
 Price Controls cause arbitrary distributive
effects
…..But they are great politics!
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27. the Markets during Disasters
 What happens to the markets for wood, tools
and even water during a disaster?
 Can’t get products in as SUPPLY decreases.
 More people want these products as
DEMAND increases.
 the Product becomes relatively more scarce.
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28. the Markets during Disasters
 What happens to the markets for wood,
tools and even water during a disaster?
 What incentive would cause suppliers to
SUPPLY more of the product?
 A price ceiling prevents the price from
rising.
 The shortage worsens.
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29. Disasters usually cause
shortages and Price Ceilings
make the shortages worse.
the Government’s Price Controls
can’t change relative scarcity but
they do distort incentives
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30. the Market in Disasters
 Considering what happens to markets for
products like wood, tools and even water
during a disaster?
 Trucks can’t bring products in thereby decreasing
SUPPLY
 More people need these products than under
“normal” thereby increasing DEMAND
 So why do people cry price gouging?
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31. Price Gouging???
 As economists we know if the
government felt sorry for these people
and imposed a price floor on certain
products there will be a shortage.
 Other people feel the prices are “made
artificially high” to take advantage of the
affected “victims”. This is an untrue
statement.
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32. PRICE CONTROLS
DISTORT MARKET
INCENTIVES AND
CAUSE THE
MISALLOCATION
OF RESOURCES
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33. Main Points [continued (a)]
 Relative scarcity for a particular product is the defined
by relationship between SUPPLY & DEMAND
 Consistent with CIIP, SUPPLY & DEMAND determine
the relative scarcity of a product. The relative scarcity
is accurately measured by the price of the product.
 The Law of SUPPLY states price and quantity move in
the same direction.
 Price Elasticity of SUPPLY measures the strength of a
suppliers’ response to price changes.
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34. Main Points [continued (b)]
 the Law of DEMAND states the price
and the quantity demanded move in
the opposite direction.
 the Price Elasticity of DEMAND
measures the strength of the buyers’
reactions to price changes.
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35. Main Points [continued (c)]
 Supply represents the marginal opportunity cost
of producing different quantities of a product.
 Demand represents the marginal utility of
consuming different quantities of a product.
 Allocative efficiency occurs at the equilibrium
where the marginal opportunity cost of
producing a quantity is just equal to the marginal
utility of consuming that quantity.
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36. Main Points
 a surplus exists at a price above the equilibrium
point where the quantity supplied is greater than the
quantity demanded
 a shortage occurs at a price below the equilibrium
point where the quantity demanded is greater than
the quantity supplied
 if there is no price floor a surplus will correct itself
as the price falls
 if there is no price ceiling a shortage will correct
itself as the price rises
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