Chapter 6 Prices

Combining Supply and Demand Chapter 6, Section 1 Equilibrium

Equilibrium  The point where supply and demand come together is known as equilibrium  In a market that is in equilibrium, prices adjust to make quantity supplied and quantity demanded equal  Graphically this is the point where the supply curve and demand curve intersect

Disequilibrium  If the price, or quantity supplied, or demanded is anywhere other than equilibrium, the market is in DISEQUILIBRIUM  Excess Supply...more than is wanted (or demanded)  Excess Demand...more than is available (or supplied)

Excess Demand  With excess demand comes shortages  Suppliers will raise the price as they see that consumers want more  As price goes up, demand will go down and equilibrium will be reached  As long as there is excess demand, suppliers will continue to raise price

Excess Supply  If the price is too high, markets will face excess supply or a surplus.  Consumers do not demand the good at the higher price and may seek substitutes or go without  Suppliers will have to throw out products or sell them very cheap.  Suppliers lower price to meet demand

Reaching Equilibrium  Whenever prices are flexible, forces of the free market will push towards equilibrium  Sellers will not waste extra resources on excess supply, so they will drop prices  This helps meet the demand of that good  Prices will then move toward the equilibrium level

Government Intervention  Although market forces will push towards equilibrium, the government may step in to help regulate prices or markets  Price Ceilings  Set below the equilibrium price  Price Floors  Will ensure sellers receive a minimum reward for their efforts

Price Ceilings  A maximum price that sellers can charge for a good or service  Price ceilings are placed on goods that are considered essential  Rent control...often used to help poor with housing  Some problems arise...there is excess demand...how do we decide who gets what?  Apartments are not kept up because landlords have so many buildings

Price Floors  Minimum price that must be paid for a good or service  Minimum Wage...set by federal government but states can set higher  Problems...if the minimum wage is set above equilibrium, there will be a surplus of workers causing an increase in unemployment  Another reason to focus on education  Price Floors have also been used in agriculture with the government buying excess supply

Review 1. Equilibrium in a market means which of the following? (a) the point at which quantity supplied and quantity demanded are the same (b) the point at which unsold goods begin to pile up (c) the point at which suppliers begin to reduce prices (d) the point at which prices fall below the cost of production 2. The government’s price floor on low wages is called the (a) market equilibrium (b) base wage rate (c) minimum wage (d) employment guarantee

Changes in Market Equilibrium Chapter 6, Section 2

Shifts in Supply  A shift in the supply curve will change the equilibrium price and quantity  A shift in supply may result in a surplus or shortage  Surplus...excess supply  Shortage...excess demand  Eventually, prices will adjust until a new equilibrium point is reached

Changes in Supply  Often caused by  Technology...new technologies increase supply and lower price  Input costs...rising input costs may decrease supply and increase price

Shifts in Demand  Sudden changes in demand often occur with fads  New toys around Christmas  New Phones, Tablets, clothes, etc.  This results in excess demand or shortages and presents search costs  Search costs...the financial and opportunity costs of seeking a product  Driving to two different stores because of a lower price

Shifts in Demand  Eventually, firms raise their prices, increase supply and meet demand OR  The fad passes and excess demand becomes excess supply and prices drop

Changes in Demand  Caused by:  Fads  New goods that come out during certain times of year  Anticipation  What do consumers think will happen in the future?

Review 1. When a new equilibrium is reached after a fall in demand, the new equilibrium has a (a) lower market price and a higher quantity sold. (b) higher market price and a higher quantity sold. (c) lower market price and a lower quantity sold. (d) higher market price and a lower quantity sold. 2. What happens when any market is in disequilibrium and prices are flexible? (a) Market forces push toward equilibrium. (b) Sellers waste their resources. (c) Excess demand is created. (d) Unsold perishable goods are thrown out.

The Role of Prices Chapter 6, Section 3

Prices  Prices serve a vital role in the free market  They move land, labor and capital into the hands of producers and products to consumers  They are the driving force behind supply and demand

Advantages of Prices  They serve as an incentive  Buyers and sellers are motivated by prices  They are signals  They tell about goods and future production and spending  They are flexible  They can be easily changed to solve supply and demand problems  As compared to changing production

Supply Shock  Supply shock is the term used to describe a sudden shortage of a good  Supply shocks are sometimes met with rationing   A system used to distribute resources without changing price  Supply shock and rationing can lead to a black market

Black Markets  A black market is a market in which goods are sold illegally  Can be used to sell goods  During times of ration  That are illegal  Landlord rents an apartment to a renter at a government level but with “extra cash” payment

Market Problems  Although markets strive to run efficiently and there are many elements of the free market that aid this, there are still problems  Cannot predict behaviors of people  Not always ideal competition  Spillover costs or externalities  External elements of production paid by the consumer  Pollution, land use etc...

Review 1. What prompts efficient resource allocation in a well- functioning market system? (a) businesses working to earn a profit (b) government regulation (c) the need for fair allocation of resources (d) the need to buy goods regardless of price 2. How do price changes affect equilibrium? (a) Price changes assist the centrally planned economy. (b) Price changes serve as a tool for distributing goods and services. (c) Price changes limit all markets to people who have the most money. (d) Price changes prevent inflation or deflation from affecting the supply of goods.