1 / 15

CNANGES IN MARKET EQUILIBRIUM

CNANGES IN MARKET EQUILIBRIUM. Economists say that a market will tend toward equilibrium. Why? There are two forces that can push a market into disequilibrium: A shift in demand A shift in supply. CHANGE IN PRICE. A shift of the supply curve will change the equilibrium price and quantity.

Download Presentation

CNANGES IN MARKET EQUILIBRIUM

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. CNANGES IN MARKET EQUILIBRIUM Economists say that a market will tend toward equilibrium. Why? There are two forces that can push a market into disequilibrium: A shift in demand A shift in supply

  2. CHANGE IN PRICE • A shift of the supply curve will change the equilibrium price and quantity. • Shift in supply is caused by many factors technology, taxes, subsidies, price of raw materials, and labor

  3. SHIFTS IN DEMAND • An increase in market demand will affect the equilibrium in that market. • Shifts in demand cause problems • Shortages • Search costs • Excess supply

  4. THE ROLE OF PRICES • Prices are a key element of equilibrium. Price changes can move markets back toward equilibrium and solve the problem of excess demand and excess supply. • Prices in a free market are a tool to distribute goods and resources

  5. PRICES IN THE FREE MARKET • Prices serve a vital role in a free market economy. • Prices help move land, labor, and capital into the hands of producers. • They help put finished goods into the hands of consumers.

  6. ADVANTAGES OF PRICES • Prices provide a language for buyers and sellers. Without them a supplier would have no consistent and accurate way to measure demand for a good. • Price as an incentive • Both buyers and sellers look at prices to find information on a goods demand and supply • Prices are a signal that tell a consumer or producer how to adjust • Prices communicate to both buyers and sellers whether a good is in short supply or readily available.

  7. ADVANTAGES OF PRICES CONT. • Prices as Signals • High prices are a signal to producers that a good is in demand and that they should produce more • Low prices are a signal to producers that a good is being overproduced and that they should use there resources to produce another good that would make them more profits. • Low prices tell consumers to buy more low opportunity cost • High prices tell consumers to buy less

  8. ADVANTAGES OF PRICE CONT. • Flexibility • When supply or demand shifts the equilibrium in that market is changed and quantity supplied and price need to change to rebalance the market. • Prices are easily increased or decreased to solve excess demand or excess supply. • Output levels are not flexible • Supply shock sudden shortage • Rationing

  9. ADVANTAGES OF PRICES CONT • PRICE SYSTEM IS “FREE” • Distribution of goods in a free market system based on prices costs nothing to administer unlike a centrally planned economy. • Free market system pricing distributes goods through millions of decisions made every day by producers and consumers.

  10. WIDE CHOICE OF GOODS • A benefit of a market-based economy is the diversity of goods and services a consumer can buy. • Prices give producers a way to allow consumers to choose similar products • Prices provide an easy way for a consumer to narrow their choices to a certain price range • Prices allow producers to target the audience they want with the products that will sell the best to that group.

  11. WIDE CHOICE OF GOODS CONT. • Rationing • Government controls the distribution of goods Why do it? • Shortages • Black Market • When people do business without regard for government controls on price of quantity. • It allows consumers to pay more so they can buy a good when rationing makes a good otherwise unavailable.

  12. EFFICIENT RESOURCE ALLOCATION • All of the advantages of a free market system allows prices to allocate resources efficiently. • The economic resources land, labor, and capital will be used for their most valuable purposes. • A market system, with its freely changing prices, ensures that resources go to the uses that consumers value most. • A price based system also ensures that resources use will adjust to the changing demands of consumers. • All of these changes take place without any government control because people who own the resources look for the largest profit. • How do people who earn the largest profit?

  13. PRICES AND THE PROFIT INCENTIVE • What would happen if a hot summer was predicted? • What would consumers do? • What would power companies do? • What would happen to prices? • What would producers do? • The rise in prices would have given the incentive to producers to meet these needs

  14. THE WEALTH OF NATIONS • Adam Smith explained that producers do not provide goods because of charity but instead they provide goods because prices are such that they will profit by provide those goods. • Market Problems • There are some exceptions to the idea that markets lead to an efficient allocation of resources. • Imperfect competition it can affect prices and higher prices affect consumer decisions (few producers not enough competition higher prices) • Spillover costs (externalities) Producers do not pay these cost so they will produce more than the equilibrium quantity. Extra cost past on to consumer • Imperfect information if buyers and sellers do not have enough information to make informed choices about a product leads to bad choices.

More Related