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Chapter 6. Prices. Reaching Equilibrium. Supply and Demand Meet The point where demand and supply come together is called the equilibrium It is the point of balance at which the quantity demanded equals the quantity supplied At equilibrium, the market for a good is stable

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chapter 6

Chapter 6

Prices

reaching equilibrium
Reaching Equilibrium
  • Supply and Demand Meet
    • The point where demand and supply come together is called the equilibrium
    • It is the point of balance at which the quantity demanded equals the quantity supplied
    • At equilibrium, the market for a good is stable
    • Simply look for the price at which the quantity supplied equals the quantity demanded
    • When looking at a graph, look for the point where the supply and demand curve intersects
reaching equilibrium1
Reaching Equilibrium
  • Market Benefits
    • In any market, supply and demand will only be equal at only one price and one quantity
    • At the equilibrium price, buyers will purchase exactly as much of a good as firms are willing to sell
    • At equilibrium, both buyers and sellers benefit
disequilibrium
Disequilibrium
  • Disequilibrium
    • If the market price or quantity supplied is anywhere but equilibrium, the market is in a state of disequilibrium
    • This occurs when quantity supplied is not equal to quantity demanded in a market
    • Disequilibrium can produce one of two outcomes: shortage or surplus
disequilibrium1
Disequilibrium
  • Shortage
    • The problem of shortage, also known as excess demand, exists when the quantity demanded in the market is more than quantity supplied
    • When the actual price in a market is below the equilibrium price, you have a shortage, because low prices encourages buyers and discourages sellers
disequilibrium2
Disequilibrium
  • From Shortage to Equilibrium
    • As long as there is a shortage and quantity demanded exceeds the quantity supplied, suppliers will keep raising the price
    • Once prices have risen enough to close the gap, suppliers have found the highest price that the market will bear
    • This will continue until a new equilibrium
disequilibrium3
Disequilibrium
  • Surplus
    • If the price is too high, the market will face the problem of surplus, also known as excess supply
    • This exists when quantity supplied exceeds quantity demanded and the actual price of a good is higher than equilibrium price
  • From Surplus to Equilibrium
    • As the price falls, the quantity demanded will rise, and more customers will buy more
    • Whenever the market is in disequilibrium and prices are flexible, market forces will push the market toward equilibrium
price ceiling
Price Ceiling
  • Price Ceiling
    • The government may intervene to control prices
    • This is the maximum price that can be legally charged for a good or service which is below equilibrium price
  • Rent Control
    • The government sets prices on some goods that are considered essential
    • Rent control is ceiling price placed on apartment rent, to prevent inflation during a housing crisis (1940’s New York City)
    • The price ceiling increases the quantity demanded but decreases the quantity supplied
price ceilings
Price Ceilings
  • The Cost of Rent Control
    • Although governments pass rent control laws to help the renters with the greatest need, few of these renters benefit from rent control
    • Long waiting lists, discrimination by landlords, a lottery system, and bribery may be used to get those scarce apartments
    • Luck becomes important or even inheriting apartments
    • Since rent control limits profits, landlords may cut costs
price ceilings1
Price Ceilings
  • Impact of Ending Rent Control
    • Many people would be able to find a wider selection of apartments
    • Landlords would also have a better incentive to maintain their buildings and invest in new construction
    • On the other hand, renters in price controlled apartments may no be able to afford higher rents
    • Most economists believe that by ending rent control, the benefits will exceed the cost
price floors
Price Floors
  • Price Floor
    • A price floor is a minimum price, set by the government, that must be paid for a good or service
    • This is to ensure that sellers receive at least a minimum reward for their efforts, including labor
  • The Minimum Wage
    • Minimum wage is the minimum price that an employer can pay a worker for an hour of labor
    • Federal government sets it, but state’s can make it higher
    • Refer to graph 6.4
price floors1
Price Floors
  • Price Supports in Agriculture
    • During the Great Depression, whenever prices fell below a certain level, the government would buy the excess crops
    • Supporters of price floors felt that this must happen in order for farms to survive in a competitive market
    • Opponents said that the government dictated what farmers should produce and in what quantities
    • 1996 Congress outlawed many of these programs because of the conflict with free market principles
an increase in supply
An Increase in Supply
  • What are some of the factors that a supply curve will shift?
    • 1.
    • 2.
    • 3.
    • 4.
    • 5.
    • A shift in the supply curve to the left or right will cause a new equilibrium
    • Since markets tends towards equilibrium, a change in supply will set in motion market forces that lead the market to a new equilibrium price and quantity sold
an increase in supply1
An Increase in Supply
  • A Change in Market
    • Technology in digital cameras have greatly reduced the prices of digital cameras
    • Advances in production have allowed manufacturers to produce digital cameras at a lower cost
    • These lower costs have been passed on to consumers in the form of lower prices
    • Supply curve shifts to the right because of advancement in technology
    • Draw the shift in supply of digital cameras like in figure 6.5
an increase in supply2
An Increase in Supply
  • Finding a New Equilibrium
    • Producers are willing to supply a larger quantity at each price
    • Once inventory, or the quantity of goods that a firm has on hand, starts to pile up, there is a surplus
    • Suppliers will have to respond to the surplus by reducing prices
    • The new equilibrium point marks a lower equilibrium price and a high equilibrium quantity
  • Changing Equilibrium
    • Equilibrium is a moving target that changes with market conditions
a decrease in supply
A Decrease in Supply
  • A Decrease in Supply
    • Other factors make the supply curve shift to the left
    • If rubber and steel prices rise, manufacturers will produce fewer cars at all price levels, and shift the supply curve left
    • If autoworkers win higher wages, the company pays more labor to build the cars and supply will decrease
    • This will cause suppliers to raise their prices and the quantity demanded will fall
an increase in demand
An Increase in Demand
  • An Increase in Demand
    • Almost every year we experience a fad, or a product that enjoys enormous popularity for a fairly short time
    • This shifts the demand curve to the right
  • The Shortage Problem
    • Shortage in a store appears as empty shelves or long lines
    • Also appears in search costs, or the financial and opportunity cost that consumers pay in searching for a product or service
      • Driving or calling to different stores
      • Causes first come, first serve policies
an increase in demand1
An Increase in Demand
  • Return to Equilibrium
    • Customers may actually push prices up on their own if there is a bidding in the market, like in real estate, antiques, fine art, and rare items
    • Prices will continue to rise until a new equilibrium is formed
    • When demand increases, equilibrium price and quantity will increase
a decrease in demand
A Decrease in Demand
  • A Decrease in Demand
    • When a fad passes its peak, demand can quickly fall as it rose
    • The shortage turns into a surplus
    • As demand falls, the demand curve shifts left
    • Suppliers will respond by cutting prices on their inventory
prices in a free market
Prices in a Free Market
  • Free Market
    • Prices are nearly the most efficient way to allocate, or distribute, resources
    • Prices help land, labor, capital into the hands of producers and finished goods into the hands of buyers
  • Centrally Planned
    • The alternative is distributing goods and resources in a centrally planned economy that is inefficient and not based on price
the advantages of price
The Advantages of Price
  • The Advantage of Price
    • Prices provide a common language for buyers and sellers
    • Without price, a seller would have to barter for goods
    • The supplier would also have no consistent and accurate way to measure demand for a product
  • Price as an Incentive
    • Buyers and sellers look at price to find info on a good’s demand and supply
    • Prices are signals to tell producers and buyers how to adjust
    • Prices tell is goods are readily available or in short supply
the advantages of price1
The Advantages of Price
  • Price as Signals
    • High price is a signal for producers to produce more of a good
    • Low price is a signal that a good is being over produced
    • Low prices may tell a producer to use their resources to produce another good
    • Consumers on the other hand, low prices tells them to buy more
    • A high price tells the consumer to stop and think carefully before buying
the advantage of price
The Advantage of Price
  • Flexibility
    • It is very important for prices to be flexible
    • Prices are much more flexible then quantity
    • Prices can be increased to solve a shortage and be decreased to solve the problem of surplus
    • Supply shock is a sudden shortage of a good, such as gasoline or wheat
      • Creates a shortage because suppliers can no longer meet demand
      • How to divide up immediate supply?
    • Rationing, or a system of allocating goods and services using criteria other than price
    • Raising prices is the quickest way to reduce quantity demanded
the advantage of price1
The Advantage of Price
  • Price System is “Free”
    • Refer to page 151
choice and efficiency
Choice and Efficiency
  • Choice and Efficiency
    • Prices help consumer choose among similar products
    • Prices make it easy for you to make a price range
    • Producers get to target the audience they want for their prices
    • In a centrally planned economy, to cut costs, they limit the variety of a product
    • This makes fewer choices for the consumers
choice and efficiency1
Choice and Efficiency
  • Rationing and Shortages
    • Read example on page 152
  • The Black Market
    • When people conduct business without regard for government controls on price or quantity, they are said to do business on the black market
    • Black market allows consumers to pay more so they can buy a product when rationing makes it otherwise unavailable
  • Efficient Resource Allocation
    • Means that economic resources are used for their most valuable purpose
    • The people who own the land, labor, and capital sell their resources to the highest bidder
prices and the profit incentive
Prices and the Profit Incentive
  • Prices and the Profit Incentive
    • Refer to page 153
  • The Wealth of Nations
    • Adam Smith wrote about profit incentive
    • Business prospers by finding out what people want, and then providing it
  • Market Problems
    • Imperfect competition can affect prices, and higher prices can affect consumer decisions
    • Negative externalities can include unintended costs like air and water pollution
    • Imperfect information can hurt the market if the consumers don’t have the right information
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