Disequilibrium
A surplus exerts downward pressure on the price, and a shortage exerts upward pressure. Markets, however, don’t always reach equilibrium quickly. During the time required to adjust, the market is said to be in disequilibrium. Disequilibrium is usually temporary as market forces push toward equilibrium. But sometimes, often as a result of government intervention, when market forces are suppressed, disequilibrium can last a while, perhaps decades, as we will see next.
Price Floors
Sometimes public officials force a price above the equilibrium level. For example, the federal government regulates some agriculture prices in an attempt to ensure farmers a higher and more stable income than they would otherwise earn. To achieve a higher price, the government imposes a price floor, or a minimum selling price that is above the equilibrium price. Panel (a) of Exhibit 10 shows the effect of a $2.50 per gallon price floor for milk. At that price, farmers supply 24 million gallons per week, but consumers demand only 14 million gallons, yielding a surplus of 10 million gallons. This surplus milk will pile up on store shelves, eventually souring. To take it off the market, the government usually agrees to buy the surplus milk. The federal government, in fact, has spent billions buying and storing surplus agricultural products over the years. Note, to have an impact, a price floor must be set above the equilibrium price. A price floor set at or below the equilibrium price wouldn’t matter (how come?). Price floors distort markets and reduce economic welfare.
Price Ceilings
Sometimes public officials try to keep a price below the equilibrium level by setting a price ceiling, or a maximum selling price. Concern about the rising cost of rental housing in some cities prompted city officials to impose rent ceilings. Panel (b) of Exhibit 10 depicts the demand and supply of rental housing. The vertical axis shows monthly rent, and the horizontal axis shows the quantity of rental units. The equilibrium, or marketclearing, rent is $1,000 per month, and the equilibrium quantity is 50,000 housing units. Suppose city officials set a maximum rent of $600 per month. At that ceiling price, 60,000 rental units are demanded, but only 40,000 supplied, resulting in a housing shortage of 20,000 units. Because of the price ceiling, the rental price no longer rations housing to those who value it the most. Other devices emerge to ration housing, such as long waiting lists, personal connections, and the willingness to make underthe- table payments, such as “key fees,” “finder’s fees,” high security deposits, and the like. To have an impact, a price ceiling must be set below the equilibrium price. A price ceiling set at or above equilibrium wouldn’t matter. (Again, why not?) Price floors and ceilings distort markets and reduce economic welfare. Let’s take a closer look at rent ceilings in New York City in the following case study.
A surplus exerts downward pressure on the price, and a shortage exerts upward pressure. Markets, however, don’t always reach equilibrium quickly. During the time required to adjust, the market is said to be in disequilibrium. Disequilibrium is usually temporary as market forces push toward equilibrium. But sometimes, often as a result of government intervention, when market forces are suppressed, disequilibrium can last a while, perhaps decades, as we will see next.
Price Floors
Sometimes public officials force a price above the equilibrium level. For example, the federal government regulates some agriculture prices in an attempt to ensure farmers a higher and more stable income than they would otherwise earn. To achieve a higher price, the government imposes a price floor, or a minimum selling price that is above the equilibrium price. Panel (a) of Exhibit 10 shows the effect of a $2.50 per gallon price floor for milk. At that price, farmers supply 24 million gallons per week, but consumers demand only 14 million gallons, yielding a surplus of 10 million gallons. This surplus milk will pile up on store shelves, eventually souring. To take it off the market, the government usually agrees to buy the surplus milk. The federal government, in fact, has spent billions buying and storing surplus agricultural products over the years. Note, to have an impact, a price floor must be set above the equilibrium price. A price floor set at or below the equilibrium price wouldn’t matter (how come?). Price floors distort markets and reduce economic welfare.
Price Ceilings
Sometimes public officials try to keep a price below the equilibrium level by setting a price ceiling, or a maximum selling price. Concern about the rising cost of rental housing in some cities prompted city officials to impose rent ceilings. Panel (b) of Exhibit 10 depicts the demand and supply of rental housing. The vertical axis shows monthly rent, and the horizontal axis shows the quantity of rental units. The equilibrium, or marketclearing, rent is $1,000 per month, and the equilibrium quantity is 50,000 housing units. Suppose city officials set a maximum rent of $600 per month. At that ceiling price, 60,000 rental units are demanded, but only 40,000 supplied, resulting in a housing shortage of 20,000 units. Because of the price ceiling, the rental price no longer rations housing to those who value it the most. Other devices emerge to ration housing, such as long waiting lists, personal connections, and the willingness to make underthe- table payments, such as “key fees,” “finder’s fees,” high security deposits, and the like. To have an impact, a price ceiling must be set below the equilibrium price. A price ceiling set at or above equilibrium wouldn’t matter. (Again, why not?) Price floors and ceilings distort markets and reduce economic welfare. Let’s take a closer look at rent ceilings in New York City in the following case study.
Government intervention is not the only source of market disequilibrium. Sometimes, when new products are introduced or when demand suddenly changes, it takes a while to reach equilibrium. For example, popular toys, best-selling books, and chart-busting CDs sometimes sell out. On the other hand, some products attract few customers and pile up unsold on store shelves, awaiting a “clearance sale.”
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