Lecture Notes: Equilibrium and Market Dynamics

Overview

• Core Concepts: Supply and Demand
• Today's Focus: Equilibrium in markets

Key Concepts

Markets

• Definition: A setting that brings together potential buyers and sellers.
• Buyers: Known as demanders.
• Sellers: Known as suppliers.
• Types of Markets:
  • Traditional (e.g., car dealerships)
  • Online platforms (e.g., eBay, Facebook Marketplace)
  • Informal/local settings (e.g., yard sales)
• Role Reversal in Markets:
  • As buyers, we demand goods.
  • As workers, we supply labor.

Equilibrium

• Definition: A situation where nobody has an incentive to do something different.
• Example: Grocery store lines reaching equal length.
• Flowchart Analysis:
  • Check if someone would be better off doing something different.
  • If yes, the situation is not in equilibrium.
  • If no, equilibrium is reached.

Incentives

• Definition: An opportunity to make oneself better off.
• Example: Picking up a $5 bill on the ground.
• Role in Markets: Incentives drive changes in behavior leading towards equilibrium.

Supply and Demand

Market Dynamics

• Demand Curve: Shows quantity demanded at various prices.
• Supply Curve: Shows quantity supplied at various prices.
• Surplus: Occurs when quantity supplied exceeds quantity demanded.
• Shortage: Occurs when quantity demanded exceeds quantity supplied.
• Price Adjustments:
  • Surpluses lead to price decreases.
  • Shortages lead to price increases.

Equilibrium in Supply and Demand

• Market Equilibrium:
  • Quantity supplied equals quantity demanded.
  • Prices are stable as there are no incentives to change.

Real-World Applications

Uber Surge Pricing

• Surge Pricing as a Signal: Indicates high demand and low supply.
• Effect:
  • Encourages more drivers to supply rides.
  • Discourages riders by increasing prices.

Taylor Swift Tour Example

• High Ticket Prices: Signal high demand.
• Response: Additional tour dates added to increase supply.

Case Study: Uber Glitch

• Description: Surge pricing glitch led to increased ride requests but low completion rates.
• Result: Most riders couldn’t get rides.

Shifts in Supply and Demand

Changes Impacting Equilibrium

• Advertising: Increases demand, shifting the demand curve right.
• New Factory: Reduces production costs, increasing supply, shifting the supply curve right.

Analyzing Shifts

• Separate Graphs for Analysis: Avoid clutter by using separate graphs for each shift.
• Determine Effects:
  • Price changes can be ambiguous when multiple factors are in play.
  • Quantity changes are clearer, often resulting in increased quantities.

Conclusion

• Markets are dynamic: Constant changes in supply and demand affect equilibrium.
• Understanding shifts: Key to predicting market behavior and price stability.
• Practical application: Framework aids in real-world economic decision-making.