3.1 Graphing Exercise: Supply and Demand

The buying decisions of households and the selling decisions of businesses are brought together in a market. Here, market pressures created by surpluses or shortages serve to determine the price of the product and the amount bought and sold.

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Exploration: How do changes in supply or demand affect equilibrium price and quantity?

Consider the market for corn as summarized in the graph. Currently, the market is in equilibrium - neither surplus nor shortage - at a price of $3 per bushel with 7 thousand bushels being bought and sold per week. Using the interactive graph, you can predict the impact on market price and quantity of changes in conditions affecting the corn market. To use the graph, shift either the supply or demand curve by clicking on the curve's label and, holding down the left mouse button, dragging the curve to the new location. Once the curves are in place, release the mouse button and click on the New Equilibrium button to observe the changes in price and quantity.

1. What is the likely effect on equilibrium price and quantity if corn farmers experience an extended period of bad weather?
   See answer here.
2. What is the likely effect on the equilibrium price and quantity of corn if the government requires ethanol (a corn byproduct) to be added to all gasoline to reduce emissions?
   See answer here.
3. Suppose both of the above incidents occur - bad weather and a government ethanol mandate? How will the corn market be affected?
   See answer here.
4. Experiment on your own: drag either the supply curve, the demand curve, or both, followed by clicking the New Equilibrium button. What generalizations can you draw with respect to changes in equilibrium price and quantity?
   See answer here.

3.2 Graphing Exercise: Price Floors and Ceilings

Government authorities often feel political pressure that a market price is either unfairly high to buyers or unfairly low to sellers. Sometimes the government responds by establishing a legal limit on how high a price can be charged (called a price ceiling) or on how low a price can be charged (called a price floor). If the equilibrium price is beyond the legal limit, the resulting shortage or surplus will disrupt the rationing function of prices.

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Exploration: How do price controls affect the ability of markets to allocate goods and services?

The graph shows a typical market in equilibrium at price P_e. To illustrate the impact of an effective price floor, click inside the magenta box; click inside the blue box to illustrate an effective price ceiling. Once a ceiling or floor has been established, you can drag on the blue triangle price slider to adjust prices within the legal range.

1. How will a price floor affect a competitive market?
   See answer here.
2. How will a price ceiling affect a competitive market?
   See answer here.
3. Experiment on your own. After establishing a floor or ceiling with the mouse, click on the level just established and drag it within the box to change its level. What generalizations can you draw regarding the level of the floor or ceiling and the size of the resulting surplus or shortage?
   See answer here.