Chapter 6.1 Combining Supply and Demand Supply + Demand and balance Market Equilibrium Govt control of prices Price ceilings and Price floors

Balancing the Market Combining Demand and Supply Schedules will allow a common ground to be found $ .50 1.00 1.50 2.00 2.50 3.00 Q D Q S 300 250 200 150 100 50 350 Shortage Equilibrium Surplus

Equilibrium Point at which demand = supply At equilibrium, market is stable If the points are anywhere else Market Disequilibrium Excess Demand Excess Supply

3.50 S Surplus (excess supply) $ Equilibrium Shortage (excess demand) D 350 Q

Govt Intervention Govt regulation can include price ceilings and floors Price Ceilings - max price Rent control Creates greater demand

Govt Intervention Problems associated with Price Ceilings Long lists/lines Discrimination Bribery Abuse Limit on profits Cut costs/ maintenance

Govt Intervention Price floors - minimum price Minimum wage Gives everyone an incentive to work Can create a surplus of labor Employers not willing to hire as many employees at higher wages

6.2 Changes in Market Equilibrium How do prices change in the market New equilibrium with change in supply and demand

The market tends to move toward equilibrium More demand leads to higher prices Prices that are too high lead to less demand Too much surplus will cause a slash in prices Falling prices creates higher demand

3.50 S $ Surplus Equilibrium 2.00 Shortage D Q 200 350

Shifts in Supply Equilibrium - where supply equals demand A shift in the supply curve will create a new equilibrium point New Equilibrium Is along the Demand curve, No shift in the demand curve S1 If the price does not change, there will be a surplus S2 $ To become balanced again, prices will drop D Q

Equilibrium is always changing as markets change Technology is always improving Rebates and sales are a method of moving goods off the shelves

Shift in Supply When costs of production go up, supply goes down Curve shifts left S2 S1 $ D Q

Shifts in Demand If there is a sudden increase in demand Curve shifts to the right New demand is greater than supply Creates a shortage Search costs - financial and opportunity costs consumers pay in looking for a good

Shifts in Demand Goods that are available get distributed to different stores Creates long lines limits on how many may be purchased “first come, first serve” Bidding wars Price will continue to rise until Demand is met

Increase in Demand S $ D2 D1 Q

Decrease in Demand After a fad, demand can drop as fast as it went up Now there is a surplus S $ D1 D2 Q

The Role of Prices Prices in the Free Market 6.3 Prices in the Free Market Advantages to price based system Price based system leading to more choices and more efficient use of resources

Prices are key to Equilibrium Prices help move land, labor and capital to the producers and finished goods to consumers Without prices, there would be no consistent way to measure demand

Advantages 1. Price as incentive 2. Price as signals Communicate what goods are in short supply or more available Produce more or less 2. Price as signals If prices are high Producers willing to make more Consumers will buy less Low price Slow production Consumers buy more

Advantages 3. Flexibility Increase in demand will increase price Supply Shock - sudden shortage of a good How does the available supply get split up Raising price keeps only those who can afford a good in the market Rationing - dividing up goods using methods other than price Rationing is the basis of central planning

Advantages 4. Wider Variety of Goods Prices allow consumers to pick from similar types of goods Soviet Union vs USA The Black Market - when people sell goods without regard for government controls on price or quantity

Advantages 5. Efficiency Prices allow resources to be used where they are most valuable Where consumers want them to go

Adam Smith Problems Monopolies, oligopolies Costs that fall on others Businesses prosper by finding out what people want and making it Problems 1. Imperfect competition Monopolies, oligopolies 2. Spillover costs Costs that fall on others 3. Imperfect information May lead to a bad investment