Background Anyone who has haggled over price of a used car, an antique, or anything at a garage sale knows the opposing interests of buyers and sellers. Buyers always want to pay lowest possible price, while sellers hope to sell at highest possible price. With buyers & sellers at odds, how can a market system satisfy both groups? In a free market system, supply & demand work together. Result is a price that both sides can live with.

Supply and Demand Both supply & demand influence price of a good and quantity produced We’ll generally be looking for the equilibrium (market clearing price) = quantity demanded equals quantity supplied

Supply and Demand Review What were factors that shifted demand? Consumer Expectations Population Tastes and Preferences Income Fads What were factors that shifted supply? Government Number of suppliers Cost of inputs Natural disasters Technology Outsourcing Producer Expectations How can we use supply and demand curves to analyze changes in market equilibrium?

Excess Supply= surplus Understanding a Shift Markets tend toward equilibrium, change in supply will lead market to new equilibrium price & quantity sold. Excess Supply= surplus If surplus occurs, producers reduce prices to sell products. Creates new market equilibrium AND eliminates surplus. Fall in Supply =shortage As supply decreases, producers will raise prices and demand will decrease. SURPLUS= PRODUCERS REDUCE PRICES & SUPPLY LESS=ENCOURAGES MORE DEMAND&THEREFORE SURPLUS WILL BE ELIMINATED

Disequilibrium Excess Supply Quantity supplied is more than quantity demanded Suppliers would lower prices until could sell their inventory Excess Demand Quantity demanded is more than quantity supplied Suppliers would raise prices until fewer people demanded the good Interactions between buyers & sellers pushes the market back towards equilibrium.

Government Intervention Markets usually naturally move towards equilibrium point In some cases government steps in to control prices. This appears as : Price ceilings price ceilings Price floors

Price Ceilings: maximum legal price Occurs when price is artificially held below the equilibrium price & is not allowed to rise (can’t charge more) Why? Some G&S are deemed essential & could become too expensive Rent control is most common example

Rent Control: situation where government sets a maximum amount that can be charged for rent in an area. http://www.criticalcommons.org/Members/Ghent/clips/the%20apartment_rent%20control.mp4/view http://www.criticalcommons.org/Members/jtierney86/clips/friends-rent-control/view

http://www.nytimes.com/2015/10/19/nyregion/in-clash-with-landlord-apartment-tenants-in-new-york-use-covert-recordings.html?ref=topics&_r=0

John Stossel—Rent Control https://www.youtube.com/watch?v=R0h8kfA4i_A

The Cost of Price Ceilings= When price cannot rise to equilibrium level, creates a SHORTAGE How to allocate resources Luck? Bribery? Black Market? Creates rationing problem – who gets good/service, who doesn’t??? Cost-cutting (slumlords) $1 Pizza too cheap for all that work Cheap rent not enough to make landlords keep up their property

How to resolve shortage (excess demand) problem? First come- first served Sellers choice Lottery Government Choice

Examples Gasoline in California – 1973-1981

Negatives Benefits the buyer, a loss for the seller Black Market

Price Floors: minimum legal price Exists when the price is artificially held above the equilibrium price and is not allowed to fall (can’t charge less) Govt. trying to guarantee a price to protect producers/suppliers

Price floors create surpluses! Happens when govt. wants sellers to get a mimimum reward One well-known price floor is the minimum wage, which sets a minimum price that an employer can pay a worker for an hour of labor. Did this b/c producers use more resources to make goods than consumers are willing to pay $ for. SO GOVT. PAYS AND STORES THE AGRICULTURAL PRODUCTS. Found that it was conflicting with free enterprise & stopped, now gives emergency aid to farmers.

Examples President Obama Minimum Wage Minimum Wage Does Minimum Wage Hurt the Worker? Businessman on Minimum Wage Creates a surplus of …

MARY POPPINS QUITS https://www.youtube.com/watch?v=TlTO8ggfes8

Solutions to a surplus: Absorb the surplus Change the name of the product Incentives

JOHN OLIVER http://www.criticalcommons.org/Members/JJWooten/clips/last-week-tonight-john-oliver-discusses-minimum/view