Chapter 6 Demand, Supply, Prices

Key Concepts In a market economy, the forces of demand and supply work together to set a price that buyers and sellers find acceptable Market equilibrium — at a certain price, quantity demanded and quantity supplied are equal Equilibrium price — price at which quantity demanded and quantity supplied are equal

EXAMPLE: Market Demand and Supply Schedule (fig 6.1 pg. 165) Laws of demand and supply interact in the market Karen sells salads at her sandwich shop — wants to offer more salads at higher prices to earn more profit — customers not willing to pay higher prices for salads — Karen seeks highest price customers will pay so she can still make profit

EXAMPLE: Market Demand and Supply Schedule Cont. (fig 6.2 pg. 166) Vertical axis shows various prices Horizontal axis shows quantity of product Combined schedule gives prices, quantities for demand, supply curves Two curves intersect at point of market equilibrium

Reaching the Equilibrium Price Trial and error may be necessary for market to arrive at equilibrium — Market may have surplus—more quantity supplied than demanded — Market may have shortage—more quantity demanded than supplied

EXAMPLE: Surplus, Shortage, and Equilibrium (fig 6.3 pg. 167) Surplus, shortage shown above and below point of equilibrium Surplus, shortage measured by horizontal distance between two curves With surplus, prices tend to fall; producers cut back production With shortage, prices rise; producers increase quantity supplied

Paired Assignment (groups of 2) Think of a product you buy regularly… Set five different prices of your product One student will represent consumers and draw a demand curve Other student represents producers and draws the supply curve Combine curves on a market demand and supply graph and label equilibrium price, surplus, and shortage. Use fig 6.2 and 6.3 to help guide you.

EXAMPLE: Holiday Toys Marketers sometimes overestimate popularity, others underestimate Tickle Me Elmo doll introduced in 1996 — at first sold slowly at $30; seemed stores would have surplus — fad caught on; shortage developed, price went up — by spring, supply doubled; demand decreased, price dropped to $25 https://www.youtube.com/watch?v=xygJE5yqQW0

Disequilibrium Imbalance between quantity demanded and quantity supplied

EXAMPLE: Change in Demand and Equilibrium Price (Fig. 6.4&6.5 pg. 169) Decrease in demand at every price shifts demand curve to left — demand curve intersects supply curve at lower price — equilibrium price falls, fewer units sold even though price is lower With increase in demand, demand curve shifts to right — equilibrium price rises, more units sold even at higher prices

EXAMPLE: Change in Supply and Equilibrium Price (fig 6.6&6.7 pg. 170) If supply at every price decreases, supply curve shifts to left — curves intersect at higher price: equilibrium price rises If supply increases, supply curve shifts to right — equilibrium price falls as more units available at every price

Prices as Signals and Incentives (section2) Competitive pricing—selling products at lower prices than others — lures customers away from rival producers — maintains overall profits by selling more units

EXAMPLE: Competitive Pricing Elm Street Hardware prices snow shovels at $20 Uptown Automotive enters market, sells shovels at $13 — has lower profit margin, but hopes to sell more units Elm Street must choose to lower price or risk losing customers

Characteristics of the Price System (fig. 6.10 pg. 175) Neutral: interaction of consumers, producers sets equilibrium price Market driven: market forces, not central planners determine prices Flexible: surpluses, shortages lead producers to change prices Efficient: prices adjust until maximum number of products sold

Prices Motivate Producers and Consumers Prices motivate consumers and producers in different ways Incentive encourages people to take a certain action In price system, incentives move producers and consumers — both act in ways consistent with own best interests

EXAMPLE: Prices and Producers Prices signal whether it is good time to enter or leave a market — Rising prices create expectation of profits, leading producers to enter — Falling prices and possibility of losses lead producers to leave

Prices and Consumers Surpluses result in lower prices that motivate consumers to buy — producers signal to consumers through advertising, store displays High prices usually encourage consumers to buy substitutes — may signal shortage of a product — may signal product has a higher status than others

Lowering Costs to Reduce Prices Dell bypassed retailers, sold directly over telephone Each computer built to customer requirements after ordered — this lowered costs, Dell became low-price leader in market Internet sales pioneer—close customer contact, easy to adjust prices Dell now entering consumer electronics market

Imposing Price Ceilings (section3) Government interferes to keep some prices from going too high Price ceiling—legal maximum price a seller may charge for a product — set below the equilibrium price, so shortage results

EXAMPLE: Football Tickets and Price Ceilings College sells 30,000 football tickets at $15 — 60,000 fans want tickets College could resolve shortage by raising price to reach equilibrium College wants to keep price affordable for students On game day, some people sell tickets for $50 or more

Discussion Question Why is a price ceiling set below equilibrium price rather than above it?

Setting Price Floors Government intervenes to increase income to certain producers Price floor—legal minimum price buyers may pay for product Various programs protect agricultural products — encourage farmers to produce abundant supply of food (Examples: corn and milk, wheat) What are the effects of such farm support programs? The intention is to boost and stabilize farm incomes.

Price floors cont. Price floors create surpluses by fixing the price above the equilibrium price. At the price set by the floor, the quantity supplied exceeds the quantity demanded. In agriculture, price floors have created persistent surpluses of a wide range of agricultural commodities. Governments typically purchase the amount of the surplus or impose production restrictions in an attempt to reduce the surplus.

EXAMPLE: Minimum Wage as a Price Floor Minimum wage—least amount employer may pay for one hour of work — set by government If set above equilibrium price for job, employers may employ fewer workers — unemployment increases If set below equilibrium price, minimum wage has no effect

Rationing Resources and Products In national emergency, government may distribute products, resources Rationing—way of allocating products using factors other than price Black market—illegal buying and selling of products — violates price controls, rationing

EXAMPLE: Rationing Resources During WWII, U.S. rationed consumer goods so all could afford them — allocated resources toward war effort, not consumers From 1946–2002, North Korea strict rationing; system inefficient, corrupt — In 1996–2000, widespread famine; people set up unofficial markets — In 2002, markets legalized; prices, wages rose; government may turn back

Minimum Wage Activity Minimum wage is a critical talking point in the upcoming elections. Some candidates are proposing a hike in minimum wage. Minimum wage is about $7.25- 8/hr. and about $5/hr. for tipped employees. Go on the computers and individually look up 5 pros and cons that talk about raising the national minimum wage to $10-15/hr with a 2- 3 sentence explanation for each one. Turn in when finished for a grade! (list articles you used on your paper!) Make sure to include what could be some of the pros and cons to raising the minimum wage? Would you be for it or against it? In your paper!

Supplement Articles for Minimum Wage Activity Underline key details in the articles and read thoroughly to be able to identify textual evidence to support your claim for an increase in minimum wage or to keep it the same! http://www.business.com/entrepreneurship/the-potential-impact- of-a-15-dollar-minimum-wage/ http://gokicker.com/2015/04/15/why-fight-for-15-the-big-pros-and- cons-for-raising-the-minimum-wage/ http://www.salary.com/increasing-the-minimum-wage-pros-cons/ https://www.dol.gov/whd/state/tipped.htm http://minimum-wage.procon.org/