Price Systems At Work Econ 10/4

Warm Up What makes someone a good negotiator? When might you need to negotiate prices in your future (as a buyer or as a seller)?

Price Prices serve as a link between buyers and sellers. Help to answer the What, How, and For Whom In competitive markets prices are “neutral”—they don’t favor a consumer or producer in general In market economies prices are flexible—they can be affected by many unexpected events such as war, natural disasters, change in political leadership, trends, technology etc. Sellers hope for high prices and large profits Buyers hope for low prices and quality products

Supply and Demand Analysis Easy as 1, 2, 3 Before the change: Draw supply and demand Label original equilibrium price and quantity The change: Did it affect supply or demand first? Which determinant caused the shift? Draw increase or decrease After change: Label new equilibrium? What happens to Price? What happens to Output (Quantity)?

Market Equilibrium Price $25 22 4 $20 18 9 $15 13 $10 20 $5 6 25 Market Equilibrium: where supply is equal to demand Graph the following supply and demand schedules onto the same set of axes. Price Quantity Supplied Quantity Demanded $25 22 4 $20 18 9 $15 13 $10 20 $5 6 25

Surplus/Shortage Surplus: Quantity supplied is greater than quantity demanded Ex. If the price was $4 Shortage: Quantity supplied is less than quantity demanded Ex. If the price was $1 Equilibrium Price: is the price that leaves neither a surplus or a shortage

Changes in Demand Draw a generic supply and demand graph for coffee. Don’t forget labels! Scenario: The price of tea has increased. 1. Effect on demand/why?: 2. Effect on equilibrium price: 3. Effect on equilibrium quantity:

Changes in Supply Draw a generic supply and demand graph for cakes. Scenario: The price of flour has increased. 1. Effect on supply/why?: 2. Effect on equilibrium price: 3. Effect on equilibrium quantity:

Competitive Price Theory The advantage of a competitive market is that it allocates resources efficiently As sellers compete for buyers, they are forced to lower their prices while keeping the product in good quality. At the same time the competition amongst buyers helps prices from falling too low This is called “laissez faire” economics which means the market “runs itself” and will correct itself