P $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 Qs Qd ???

In a market with no government interference, what will the price of a widget end up being?

P $5.00 $4.00 $3.00 $2.00 $ Q S D Equilibrium Point Qs = Qd

Do suppliers automatically know where equilibrium is, and charge that price all the time? What happens if they charge a price that is higher or lower than equilibrium?

P $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 Qs Qd Surplus / Shortage

P $5.00 $4.00 $3.00 $2.00 $ Q S D How do I know if the equilibrium price and quantity I have calculated are correct? P E = $2.30 Q E = 46

P $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 Qs Qd Surplus / Shortage Qs – Qd = 0 PEPE

7 Reasons for a change in supply 1. Change in the cost of inputs –Land, labor, capital 2. Change in Productivity 3. Change in Technology –Ask Henry Ford… 4. Change in Number of Sellers –Duh.

7 Reasons for a change in supply 5. Change in Taxes or Subsidies 6. Change in Market Expectations Future prices/demand/conditions 7. Change in Government Regulation

Change in Demand 1.Change in Income mo’ money = mo’ problems purchases 2.Change in Prices and Availability of Substitutes ex: Pens and Pencils 3.Change in Prices and Availability of Complements ex: Paper and Pencils 4.Change in Weather or Seasons ex: Shorts in winter, Sleds in summer, Gas? 5.Change in Number of Buyers ex: larger/smaller market, population change, technology 6.Change in Styles, Tastes, Habits, Preferences fashion, coolness, trends – ex: 7.Change in Expectations future oriented – ex: harvest, technology

Price Controls Price Floor Price Ceiling Price Fixing

If the government fixes a price above equilibrium, it acts as a price floor. If the government fixes a price below equilibrium, it acts as a price ceiling.

P $5.00 $4.00 $3.00 $2.00 $ Q S D P F = $3.25 Surplus of 45 Price Floor

Price Floors Effect: Surplus Why set them? –To compel production Examples: Agriculture, Minimum Wage Double Whammy: –Consumers pay more –Taxpayers can take a hit Overallocation of resources –No allocative and productive efficiency

P $5.00 $4.00 $3.00 $2.00 $ Q S D P C = $1.25 Shortage of 59 Price Ceiling

Price Ceilings Effect: Shortage Why set them? –Social reasons – keep consumers from being rationed out of the market (especially for needs) Examples: Rent controls, Electricity Black Market!!! Underallocation of Resources –No allocative or productive efficiency