Rizzo started class today by putting up a bunch of graphs. In the first graph was the Supply and demand curve for the market for acoustics along with the equilibrium point of the graph (where the supply curve and demand curve meet). The equilibrium price is the price when the plan of buyers and sellers coordinate. We learned that Q demand will fall when the price goes up from. When this happens buyers plans are satisfied because there are enough guitars in supply to give everyone that wants a guitar one at that price. Sellers are satisfied because they are selling the guitar for a high profit price. Satisfied means that at a particular price you don’t change your behavior. When Qs > Qd, the extra supply is how big ones surplus is.
Two questions that everyone has to ask when economic change happens are “how does each half of the market respond, and whose plans are satisfied.” Both of these you have to relate to both buyers and sellers.
The definition of a surplus is “at a PARTICULAR PRICE when the Qs exceeds Qd.” When sellers plans are satisfied, they try to do something about it.
A demand curve tells you peoples marginal values. When guitars are expensive, less people buy them. When they’re cheap, more people buy them. When the marginal opportunity cost is high, it costs more to make a guitar. We ration goods by price.
Sellers will cut prices to get more buyers. When you cut prices, Qs comes back down and people buy more so Qd increase. At best price with most buyers is when equilibrium happens. If the price falls too much, then shortages happen because more people want guitars than can produce it because if they produce too many, then they will start losing money. The sellers plans are satisfied, not the buyers because more are wanted than produced. When Qd>Qs, there is a shortage.
The definition of a shortage is “at a PARTICULAR PRICE” when Qd exceeds Qs is a shortage. Sellers have to reveal to buyers that they are willing to pay more to get more Qs. More people bring guitars to the market from this. Increase in price.
Competitive pressure on both sides of equilibrium point to get to equilibrium point. Sellers compete with one another and buyers compete with one another. High price signifies that good is relatively scarce. When prices increase, then shortages are alleviated.
Low price means that the good is relatively unscarce. Equilibrium is defined as the price where neither buyers are sellers have an incentive to alter their behavior.
Two types of equilibrium in a market. 1 is MARKET CLEARING. This is when Qd=Qs. A good market can’t do better on its own. The other is a NON MARKET CLEARING. In this, competitive bidding process stops. This is not good.
Changes in equilibrium happen from a lot of factors. Equilibrium is the (P,Q) relationship. If the price of spruce falls, then the price will be bid down because it costs less to make a product from spruce now. If the price of electric guitars increase, then the Qd increases. The 4 changes that we can see are both Price and Quantity go up, Price goes up and Quantity goes down, Price and Quantity both go down, and Price goes down but Quantity go up.
Shortages doesn’t mean that the product is scarce, just that there’s not enough produced. Scarce mean not a lot of, but can still have a surplus. Ex. Mike Tyson’s house. There is only one of them, but no one wants to buy it so there is a surplus of Mike Tyson’s house.
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