Effects of Prices

How does price affect a seller’s decision to produce a product? Main Ideas Buyers who want to find bargains and sellers who hope for large profits both play a part in determining prices. Because transactions in a market economy are voluntary, the price compromise that settles the differences between buyers and sellers must benefit both parties. When used together, supply and demand curves intersect at the equilibrium price, where the quantity of products supplied equals the quantity demanded. A surplus occurs when the price for a product is too high. A shortage occurs when the price for a product is too low.

Goals of Buyers and Sellers are Opposite! Buyer Goals Seller Goals Good Deals Low Prices High Prices Large Profits Neither can get what they want so they have to compromise.

Equilibrium Point where QD=QS Market Price Market Quantity Labeled with an E Where market pushes to be

Equilibrium Price where Q.S. = Q.D. Quantity Price where Q.S. = Q.D. Quantity of output supplied = Q.D. at the equilibrium price.

Equilibrium

Surplus Situation where Q.S. is Greater than Q.D. at a given price. A surplus drives the price Down.

Shortage Situation in which the Q.S. is LESS than Q.D at a given Price. A shortage drives the price up

Check POINT Do you think it is common for sellers to offer a new product at a price well above what turns out to be the equilibrium price? Why or why not?

Cha Cha Cha Changes Who is this?

How do changes in supply and demand affect prices? Main Ideas Changes in supply can cause large price variations. Factors that affect individual demand also affect the market demand for goods, which affects the prices of those goods. In most cases, price is affected by concurrent changes in supply and demand. The price system is more efficient when markets are competitive. Competitive markets allow prices to adjust naturally in response to surpluses and shortages. Competitive markets allocate resources efficiently.

Changes in Supply (pg. 165 figure 6.3) Increase in Supply Decrease in Supply Equilibrium point moves down Surplus at original equilibrium price Prices fall and quantity exchanged rises Equilibrium point moves up Shortage exists at old equilibrium point Prices go up and quantity exchanged goes down

Changes in Demand (pg. 165 figure 6.3) Increase in Demand Decrease in Demand Moves new equilibrium point up Shortage now exists at original price (old equilibrium) Prices rise and quantity exchanged goes up Equilibrium point moves down Surplus now exists at original price (old equilibrium) Prices fall and quantity exchanges falls

DO YOU KNOW? What to label equilibrium? Where to find a shortage? Where to find a surplus? How to eliminate a shortage? How to eliminate a surplus?