AP MICROECONOMICS Mr. Lindquist Unit #2

Double Shifts… Worksheet from yesterday (discuss and graph)

Key Questions What causes Equilibrium Price to shift? Supply and Demand What happens if a Supplier in a Perfectly Competitive market charges a price above Equilibrium Price? Excess Supply = Surplus of goods/services Below Equilibrium Price? Excess Demand = Shortage of goods/services

Perfect Market Conditions: Even number of buyers and sellers Knowledge of the market transactions Similar products Buyers and Sellers can freely enter and exit the market place Consumers and Producers come together and negotiate the price that works for both!

Why does Equilibrium Price and Quantity work? Law of Supply and Law of Demand MOST EFFICIENT – No Shortage and No Surplus MOST PROFITABLE Socially Optimal Amount

Steps for identifying changes in price/quantity Is it a Supply or Demand issue? An increase or decrease? (More or Less) Graph the changes and analyze the graph to discover price & quantity changes

EXAMPLE MSU Scientist develops new strain of corn that will increase yields by 15%? What will happen to Equilibrium Price and Quantity? Supply or Demand issue Increase or Decrease Graph and analyze graph.

Short Video Clip https://www.youtube.com/watch?v=RP0j3Lnlazs Supply and Demand of Indiana Jones

Effect of Market Controls on Prices Definition: Government intervention into market prices Price Ceilings: Setting a legal maximum price by law on “essential” items BELOW “true” market price Why? Meant to help Consumers Impact?

Example Rent Controls Pros and Cons? Food Prices?

Effect of Market Controls on Prices Price Floors Setting a minimum price by law to support workers/farmers Above “true” market price Why? Meant to help Producers Impact

Example Minimum Agricultural Prices Pros and Cons? Agricultural Adjustment Act (1933) FAIR (1996)

Key Point: Price Floors and Price Ceilings are artificial prices that result in surpluses and shortages.