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Markets, Equilibrium, and Prices. How do you know when the price is “right”?. Demand Meets Supply. Market Equilibrium.
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Markets, Equilibrium, and Prices How do you know when the price is “right”?
Market Equilibrium • market equilibrium: the point at which the quantity of goods or services that consumers are willing and able to buy equals the quantity that producers are willing and able to sell.
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Equilibrium Price The equilibrium price is the price marked by the equilibrium point on the supply and demand graph. This is also known as the market-clearing price because at this price, the market will be “cleared” of all surpluses and shortages.
Equilibrium Quantity The equilibrium quantity is the quantity marked by the equilibrium point on the supply and demand graph.
A Balancing Act • Price move to bring markets into balance. • The farmers market example is a simplified version of what takes place in larger, broader markets. • Consumers and producers send each other numerous “trial and error” messages.
A Balancing Act - Example • A grocery chain opens up that specializes in organic products, which tend to cost more. If few customers show up at the beginning, it may be a good indication that items are too expensive.
A Balancing Act • A smart business will respond to market trends, and adjust prices accordingly. • The interaction between consumers and producers automatically pushes the market price of a good or service toward the equilibrium price.
Disequilibrium • What happens when the price isn’t “right”? • When producers set a market price that is above or below the equilibrium price, this creates a state of disequilibrium. • The result is either a shortage or a surplus.
When Prices Are Too Low • What happens when the price is too low (below the point of market equilibrium)? • There is a shortage – because there won’t be enough of a good/service to meet the quantity demand.
When Prices Are Too Low • When prices are too low, there is excess demand – the quantity demanded exceeds the quantity supplied. This results in a shortage. • Imagine if Apple decided to sell the next generation iPad for just $10. Describe the scene at retailers nationwide on release day.
When Prices Are Too High • What happens when the price is too high (above the point of market equilibrium)? • There is a surplus – because there won’t be enough buyers willing and able to pay that price for the available good/service.
When Prices Are Too High • When prices are too high, there is excess supply – the quantity supplied exceeds the quantity demanded. This results in a surplus. • Imagine if Chipotle raised the price of its burritos to $60. • At least you wouldn’t have to wait a fortnight in line.
Prices in a Modern Mixed Economy • Prices convey information to consumers and producers. • In this sense, they are like messengers.
Prices in a Modern Mixed Economy • Messengers to Consumers: • The high price of Manhattan real estate says “this stuff is in short supply!” • The low price of rubber flip flops says “there are a lot more where these came from!” • The prices of big ticket items like flat screen TVs tell consumers “you should do your homework and shop around for the best deal, or you could be wasting some of your hard-earned money.”
Prices in a Modern Mixed Economy • Messengers to Producers: • Items that sell for high prices say “you should consider making more things like this!” • Items that have to end up marked down in price say “yea, this was a dud – probably shouldn’t make more of this.”
Prices in a Modern Mixed Economy • Prices create incentives to work and produce. • For even when we were with you, we would give you this command: If anyone is not willing to work, let him not eat. (2 Thess. 3:10)
Prices in a Modern Mixed Economy • Rising prices encourage existing producers to produce more, and draw in new producers because there is money to be made. • Falling prices cause some producers to exit the market, and others to cut back on production and costs, including jobs. • Higher wages encourage workers to seek better paying jobs, while low wages discourage work.
Prices in a Modern Mixed Economy • Prices allow markets to respond to changing conditions. • Prices allow markets to adjust quickly when major events such as wars and natural disasters interfere with the production or movement of goods, wreaking havoc on supply. • For example, when Hurricane Katrina hit and disabled some of the U.S. oil production, prices went up accordingly. They eventually came back down once production was restored.
Prices in a Modern Mixed Economy • Prices allocate scarce resources efficiently. • Perhaps most important in a market economy, prices guide resources to their most efficient uses. • You COULD use a gold bar as a doorstop. • OR you could turn it into fine jewelry and sell it for a large profit.
Government Interventions • Occasionally, governments will intervene in a market in an attempt to influence prices with limits called price controls. • They do this when they are persuaded that supply and demand will result in prices that are unfairly high for consumers, or unfairly low for producers.
Government Interventions • Price floors are minimum prices established to keep prices from going too low. Prices below the floor are illegal. • One example: if the equilibrium price of wheat drops too low, many farmers will be unable to make enough money to cover their costs, and go into debt. To protect farmers, government could set a price floor.
Government Interventions • The minimum wage is another example of a price floor, since it affects the price that employers pay for labor. • In some markets, where workers outnumber jobs, the equilibrium wage could be driven so low that even full-time workers would not make enough money to survive. • What downside(s) might imposing a minimum wage create, though?
Government Interventions • Price ceilings are maximum prices established to keep prices from going too high. Prices above the floor are illegal. • Governments will occasionally impose price ceilings in response to natural disasters, to ensure that necessities remain affordable.
Government Interventions • The best-known form of price ceilings in the US today is rent control. • Rent control regulations make it illegal to charge more than a specified monthly amount for rental housing. • Introduced in New York City after WWII to protect poor families, but still around today. • What potential downside(s) might there be to imposing rent control?
The first night Felice Cohen, 39, slept in her tiny apartment — with a full-size loft bed only 23 inches from the ceiling — she had a “panic attack.” “But now I love it. It’s cozy,” she said of the 12-by-7-foot place, which rents for just over $700 a month. Her tiny bathroom is a challenge, though: “I had to learn to sit sideways on the toilet so I don’t bang my leg on the tub.”
Excess Supply & Demand • When price ceilings result in shortages, governments may impose rationing – the controlled distribution of a limited supply good or service
Excess Supply & Demand • Shortages – even when there is rationing – can result in black markets. Here, goods/services are sold in greater quantities and at higher prices than legally allowed.
