Summer Semester: Equilibrium

INTRODUCTION

Today we will learn about equilibrium and efficiency (welfare) in a market where the forces of supply and demand are permitted to interact freely. Click here (Chapter 5 Notes) to download a PowerPoint presentation on elasticities and here (Chapter 7 Notes Page) to download one on market efficiency and economic welfare.

SESSION 7 PLAN

1. First half hour: How does racism cause inefficiency in the housing market? Your teacher will lecture on the this session's concepts and that question after showing this video.

2. Second half hour: Do today's problem of the day (below). I will use this to teach you the concept of price elasticity of demand in a simple (non-mathematical) form.

3. Additional resources: If you need more explanation here are some additional resources you can use.

   • Read Krugman (Module 7)

   • Watch these videos:

• Equilibrium and Allocative Efficiency

• Consumer surplus, producer surplus, and deadweight loss

Khan Academy

PROBLEM OF THE DAY

Assume that the market for cigarettes is composed of two groups: those who are addicted to cigarettes and those who are not yet. Now assume that the the government permanently raises the price of cigarettes.

1. Draw a diagram illustrating the effect of the increase in price in the market for addicted smokers.

2. Draw another diagram illustrating the effect of the increase in price in the market for non-addicted smokers.

3. Explain why the outcome in each market is different.