Demand, Supply, and Prices

1. Demand, Supply, and Prices

2. Chapter 6: Demand, Supply, and Prices KEY CONCEPT • The equilibrium price is the price at which quantity demanded and quantity supplied are the same. WHY THE CONCEPT MATTERS • In a market economy, the forces of demand and supply work together to set a price that buyers and sellers find acceptable.

3. Section-1 Seeking Equilibrium: Demand and Supply The Interaction of Demand and Supply KEY CONCEPTS • Market equilibrium — at a certain price, quantity demanded and quantity supplied are equal • Equilibrium price — price at which quantity demanded and quantity supplied are equal

4. The Interaction of Demand and Supply EXAMPLE: Market Demand and Supply Schedule • Laws of demand and supply interact in the market • Karen sells salads at her sandwich shop — wants to offer more salads at higher prices to earn more profit — customers not willing to pay higher prices for salads — Karen seeks highest price customers will pay so she can still make profit

5. The Interaction of Demand and Supply EXAMPLE: Market Demand and Supply Curve • Vertical axis shows various prices • Horizontal axis shows quantity of product • Combined schedule gives prices, quantities for demand, supply curves • Two curves intersect at point of market equilibrium

6. Reaching the Equilibrium Price KEY CONCEPTS • Trial and error may be necessary for market to arrive at equilibrium — Market may have surplus—more quantity supplied than demanded — Market may have shortage—more quantity demanded than supplied

7. Reaching the Equilibrium Price EXAMPLE: Surplus, Shortage, and Equilibrium • Surplus, shortage shown above and below point of equilibrium • Surplus, shortage measured by horizontal distance between two curves • With surplus, prices tend to fall; producers cut back production • With shortage, prices rise; producers increase quantity supplied

8. Reaching the Equilibrium Price EXAMPLE: Holiday Toys • Marketers sometimes overestimate popularity, others underestimate • Tickle Me Elmo doll introduced for holidays in 1996 — at first sold slowly at $30; seemed stores would have surplus — fad caught on; shortage developed, price went up — by spring, supply doubled; demand decreased, price dropped to $25

9. Equilibrium Price in Real Life KEY CONCEPTS • disequilibrium — imbalance between quantity demanded and quantity supplied

10. Equilibrium Price in Real Life EXAMPLE: Change in Demand and Equilibrium Price • Decrease in demand at every price shifts demand curve to left — demand curve intersects supply curve at lower price — equilibrium price falls, fewer units sold even though price is lower • With increase in demand, demand curve shifts to right — equilibrium price rises, more units sold even at higher prices

11. Equilibrium Price in Real Life EXAMPLE: Change in Supply and Equilibrium Price • If supply at every price decreases, supply curve shifts to left — curves intersect at higher price: equilibrium price rises • If supply increases, supply curve shifts to right — equilibrium price falls as more units available at every price

12. Reviewing Key Concepts Explain the differences between the terms in each of these pairs: • market equilibrium and disequilibrium • surplus and shortage

13. Section-2 Prices as Signals and Incentives How the Price System Works KEY CONCEPTS • Competitive pricing—selling products at lower prices than others — lures customers away from rival producers — maintains overall profits by selling more units

14. How the Price System Works EXAMPLE: Competitive Pricing • Elm Street Hardware prices snow shovels at $20 • Uptown Automotive enters market, sells shovels at $13 — has lower profit margin, but hopes to sell more units • Elm Street must choose to lower price or risk losing customers

15. How the Price System Works EXAMPLE: Characteristics of the Price System • Neutral: interaction of consumers, producers sets equilibrium price • Market driven: market forces, not central planners determine prices • Flexible: surpluses, shortages lead producers to change prices • Efficient: prices adjust until maximum number of products sold

16. Prices Motivate Producers and Consumers KEY CONCEPTS • Prices motivate consumers and producers in different ways • Incentive encourages people to take a certain action • In price system, incentives move producers and consumers — both act in ways consistent with own best interests

17. Prices Motivate Producers and Consumers EXAMPLE: Prices and Producers • Prices signal whether it is good time to enter or leave a market — Rising prices create expectation of profits, leading producers to enter — Falling prices and possibility of losses lead producers to leave

18. Prices Motivate Producers and Consumers EXAMPLE: Prices and Consumers • Surpluses result in lower prices that motivate consumers to buy — producers signal to consumers through advertising, store displays • High prices usually encourage consumers to buy substitutes — may signal shortage of a product — may signal product has a higher status than others

19. Michael Dell: Using Price to Beat the Competition Lowering Costs to Reduce Prices • Dell bypassed retailers, sold directly over telephone • Each computer built to customer requirements after ordered — this lowered costs, Dell became low-price leader in market • Internet sales pioneer—close customer contact, easy to adjust prices • Dell now entering consumer electronics market

20. Reviewing Key Concepts Use each of the terms below in a sentence that illustrates the meaning of the term: • competitive pricing • incentive

21. Section-3 Intervention in the Price System Imposing Price Ceilings KEY CONCEPTS • Government interferes to keep some prices from going too high • Price ceiling—legal maximum price a seller may charge for a product — set below the equilibrium price, so shortage results

22. Imposing Price Ceilings EXAMPLE: Football Tickets and Price Ceilings • College sells 30,000 football tickets at $15 — 60,000 fans want tickets • College could resolve shortage by raising price to reach equilibrium • College wants to keep price affordable for students • On game day, some people sell tickets for $50 or more

23. Imposing Price Ceilings EXAMPLE: Rent Control as a Price Ceiling • Rent-control laws kept housing affordable for low-income families • Rents did not match market, so shortage of rental housing developed • Landlords unwilling to increase own costs by maintaining properties • City of Santa Monica solution: let market set initial rent — rent control board regulates yearly increases

24. Setting Price Floors KEY CONCEPTS • Government intervenes to increase income to certain producers • Price floor—legal minimum price buyers may pay for product • Various programs protect agricultural products — encourage farmers to produce abundant supply of food

25. Setting Price Floors EXAMPLE: Minimum Wage as a Price Floor • Minimum wage—least amount employer may pay for one hour of work — set by government • If set above equilibrium price for job, employers may employ fewer workers — unemployment increases • If set below equilibrium price, minimum wage has no effect

26. Rationing Resources and Products KEY CONCEPTS • In national emergency, government may distribute products, resources • Rationing—way of allocating products using factors other than price • Black market—illegal buying and selling of products — violates price controls, rationing

27. Rationing Resources and Products EXAMPLE: Rationing Resources • During WWII, U.S. rationed consumer goods so all could afford them — allocated resources toward war effort, not consumers • From 1946–2002, North Korea strict rationing; system inefficient, corrupt — In 1996–2000, widespread famine; people set up unofficial markets — In 2002, markets legalized; prices, wages rose; government may turn back

28. Rationing Resources and Products EXAMPLE: Black Markets—An Unplanned Result of Rationing • Black markets common result of rationing; — in U.S. during WWII, black market for scarce goods developed • Pre-2002 North Korea, trade of most products forbidden or restricted — on the whole, black market prices very high — post-2002 black market continues since many products still illegal

29. Reviewing Key Concepts Explain the relationship between the terms in each of these pairs: • price floor and minimum wage • rationing and black market

30. Case Study: Prices for Concert Tickets Background • Less affluent fans cannot afford concerts, yet ticket prices rising • Ticket prices cover costs profit for performers, venues, distributors What’s the Issue? • How do demand, supply, and pricing affect the concert ticket market?

31. Case Study: Prices for Concert Tickets {continued} Thinking Economically • Do you think TicketMaster’s plan in document C would help or harm Pearl Jam’s wish “that no one will pay more than $20” to see them (document A)? Explain. • What do you think happened to quantity supplied of tickets over the span of the graph in document B? Why? • In what year in Figure 6.15 did the high price for concert tickets hit $50—the high price that Pearl Jam speaks of in document A? What year was it $20—the desired price they mention?

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