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ECONOMICS

ECONOMICS. Surplus/Shortage, Equilibrium Price and Price Ceilings/Floors. HOW PRICES ARE DETERMINED. Equilibrium Price: Price where demand EQUALS supply Also called “Market Clearing Price” NO SURPLUS OR SHORTAGE. Equilibrium Price. P. S 1. Equilibrium Price Price where Qd=Qs. P 1.

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ECONOMICS

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  1. ECONOMICS Surplus/Shortage, Equilibrium Price and Price Ceilings/Floors

  2. HOW PRICES ARE DETERMINED • Equilibrium Price: Price where demand EQUALS supply • Also called “Market Clearing Price” • NO SURPLUS OR SHORTAGE

  3. Equilibrium Price P S1 Equilibrium Price Price where Qd=Qs P1 Price D1 o Q1 Q Quantity

  4. HOW PRICES ARE DETERMINED • Surplus: When supply is greater than demand • To get rid of a surplus, stores lower prices (sales) and produce less.

  5. Surplus Surplus: Qs > Qd (Price Floor) P S1 P2 P1 Price D1 o 20 Q1 Q 15 Quantity

  6. HOW PRICES ARE DETERMINED • SHORTAGE: Demand is greater than supply • Stores respond by raising prices and producing more.

  7. Shortage P S1 Shortage: Qd > Qs (Price Ceiling) P1 P2 D1 o Q1 Q 15 20 Quantity

  8. SURPLUS OR SHORTAGE? • A very popular singer is coming to town to perform in a concert hall that seats 10,000 people. The ticket price for the concert is $30 per person. There are 30,000 fans in the area who are willing to pay $80 per ticket to attend the concert. What will happen?

  9. SHORTAGE OR SURPLUS? • The Ford Motor Company has designed a new car that resembles a Ford model that was popular 40 years ago. Ford plans to produce 100,000 of the new-old cars each year. Ford will price these cars at $24,000. There are 200,000 people per year that want to buy the car. What will happen?

  10. SHORTAGE OR SURPLUS? • The Fish and Wildlife Department in California allows people to dig for razor clams on ocean beaches 3 days a year. There is a small charge ($10) for a license to dig these clams. Millions of people enjoy eating razor clams. During most of the year they buy razor clams in fish markets for $20 to $30 per dozen. What will happen on the days people can dig razor clams themselves?

  11. THE PRICE SYSTEM • PRICE CEILING: highest price that can be charged for a good. • Ex: rent control apartments in NYC • Price ceilings result in SHORTAGES if set below market price. • See graph

  12. THE PRICE SYSTEM • PRICE FLOORS: lowest price that can be paid for a good or service • EX. – Minimum Wage: lowest legal wage that can be paid to workers • Price Floors result in a SURPLUS if set above market price.

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