Changes

==Equilibrium==

==Equilibrium==

The important concept of “equilibrium” arises frequently in economics.  It is similar to the concept of equilibrium in chemistry, as in chemical reactions.  The term “equilibrium” means a state of balance between opposing forces.  It is a settling down.  In a tug of war between opposing teams, “equilibrium” would be where the rope is stationary with each side pulling an equal amount on it.  But usually one side wins in a tug of war, so that is not the best example.  A better example of an “equilibrium” is when you have eaten just enough to satisfy your hunger, and not too much to make you feel bloated or nauseous.  You are then in “equilibrium” between hunger and overeating.  If you're still hungry then you eat more; once you are "full", you stop eating until later.

The important concept of “equilibrium” arises frequently in economics.  It is similar to the concept of equilibrium as in chemical reactions.  The term “equilibrium” means a state of balance between opposing forces.  It is a settling down.  In a tug of war between opposing teams, “equilibrium” would be where the rope is stationary with each side pulling an equal amount on it.  But usually one side wins in a tug of war, so that is not the best example.  A better example of an “equilibrium” is when you have eaten just enough to satisfy your hunger, and not too much to make you feel bloated or nauseous.  You are then in “equilibrium” between hunger and overeating.  If you're still hungry then you eat more; once you are "full", you stop eating until later.

“Equilibrium” is “where things are going” or where they have already arrived.  Economic equilibrium is when all the imbalances in the forces of selling and buying have disappeared and a perfect balance between the sellers' desire to make more money (that's like hunger) and the buyers' desire to pay as little as possible (that's like not eating).  When the market has reached a balance between these two powerful, opposing forces, then it is equilibrium.  The opposing forces of the sellers trying to make money and the buyers trying to keep money are what "drive" the price to its equilibrium level, like a tug of war.   

“Equilibrium” is “where things are going” or where they have already arrived.  Economic equilibrium is when all the imbalances in the forces of selling and buying have disappeared and a perfect balance between the sellers' desire to make more money (that's like hunger) and the buyers' desire to pay as little as possible (that's like not eating).  When the market has reached a balance between these two powerful, opposing forces, then it is equilibrium.  The opposing forces of the sellers trying to make money and the buyers trying to keep money are what "drive" the price to its equilibrium level, like a tug of war.   

When there is perfect competition, then the ultimate equilibrium is when the marginal revenue to the seller (the extra dollar that he charges and receives as revenue) equals his marginal cost in producing the good (the extra dollar he paid to produce the good).  At that point the seller's marginal profit (the extra dollar that he can keep after paying his costs) has fallen to zero and he has no incentive to produce any more goods.  In other words, the supplier keeps producing more and more goods only until his marginal profit on each extra good falls to zero such that he does not make any more money by selling additional quantity.   

When there is perfect competition in the sale of a good or service, then the equilibrium is when the marginal revenue to the seller (the extra dollar that he charges and receives as revenue) equals his marginal cost in producing the good (the extra dollar he paid to produce the good).  At that point the seller's marginal profit (the extra dollar that he can keep after paying his costs) has fallen to zero and he has no incentive to produce any more goods.  In other words, the supplier keeps producing more and more goods only until his marginal profit on each extra good falls to zero such that he does not make any more money by selling additional quantity.  The seller does not want his marginal revenue to fall below his marginal cost, because then he is losing money.

That decline of marginal profit towards zero is due to the inevitable difficulties in selling additional goods.  For example, the first SUV produced by Ford could sell at a high price, but Ford does not want to get stuck with making too many SUVs and not being able to sell them at a profit.  Ford doesn’t want to make any more SUVs in a given year that it might have to take a loss on.  Ford keeps producing SUVs only until its marginal revenue falls to its marginal cost, and its marginal profit falls to zero.  Do not worry if you do not completely understand these last two paragraphs; we'll discuss this again in greater detail in a future lecture.

This is illustrated as follows.  How long does the owner of a store keep it open at night?  As long as customers are paying him more money (marginal revenue) than it costs him to keep the store open (marginal costs).  As soon as the owner realizes that he is paying more to his workers to keep the store open than he is getting from customers, he closes his store for the night.  After a few weeks of this, the owner realizes that he makes money before a certain hour (perhaps 9pm), and loses money afterward.  Then he puts a sign on his door telling everyone that he closes at 9pm every night.  Marginal revenue exceeds marginal cost before 9pm for him (and he makes a marginal profit by staying open), while marginal costs exceed marginal revenue after 9pm (so he avoids losing money by closing).

==Discussion: Health Care==

==Discussion: Health Care==