Interaction of supply and Chapter 6 Interaction of supply and Demand Definitions Market Equilibrium where supply=demand Market price The price at which supply=demand Demand and supply schedule gives you the price and quantity supplied and quantity demanded.

Demand and supply schedule price demand supply $10.00 200 1000 $8.00 400 800 $6.00 600 $4.00 $2.00 Does the above demand and supply schedule follow the laws of demand and supply? What is the equilibrium price in the above schedule? What is the equilibrium quantity in the above schedule?

price Quantity demand Quantity supplied $2.00 1000 200 $4.00 800 400 $6.00 600 $8.00 $10.00 Demand and supply curves are graphic representations of demand and supply schedules

Shortage- quantity demanded is greater than quantity supplied Surplus quantity supplied is greater than quantity demanded Text page 168 Holiday toys

Change in demand and equilibrium price Disequilibrium –When supply and demand are not in balance demand supply equilibrium demand supply equilibrium price price or then or then

price Quantity demanded Supplies $10.00 200 1000 $8.00 400 800 $6.00 600 $4.00 $2.00 If demand increases by 200 units at each price level and supply remains constant what happens to equilibrium price? Exit exercise page 172 text

Competition- What is your definition of competition? Competitive pricing- goals maximizing profits and luring customers away from rival producers. Are their benefits to the consumer as well? Characteristics of a price system It is neutral-does not favor producer or consumer , free interaction in the market, consumers want low prices, producers want high prices. Market driven , no central planning, price system runs itself, any exceptions? It is flexible- when market conditions change, prices can respond quickly It is effiicient, producers use resources to produce the goods based on profit motive.

Price motivates both consumers and producers Producers- expectation of profits or possibility of losses motivates producers to enter or leave a market. Consumers- lower prices encourage consumers to buy, Higher prices discourage consumers form buying. How do producers encourage consumers to buy? If price of a product drops there may be a surplus in the market, If prices rise there may be a shortage in the market. Can producers create shortages? Examples.

Price ceilings – Establish the maximum price sellers may charge for a good or service. Set below equilibrium to keep prices from rising. may result. Example rent Control, no incentive to build additional apartments or to maintain existing apartments.

Price floors-minimum price a consumer must pay for a goods/service Keep prices from falling. Minimum Wage is a price floor.

What cost $1. 00 in 1938 would cost $15. 13 in 2008 What cost $1.00 in 1938 would cost $15.13 in 2008. Also, if you were to buy exactly the same products in 2008 and 1938, they would cost you $1.00 and $0.07 respectively.

Rationing- is a system in which government allocates goods and services using other factors instead of price. Can result in a black market, Rationing World War II Page 183 Rationing devices Seniority First come first serve Favoritism Force Price The government at certain times in history rationed goods. Example- Rationing can be unfair Special treatment to some groups Expensive, creates black markets

Alfred Marshall 1842-1924 Supply and demand must be studied together First to use graphs in the study of economics The concept of elasticity Need to do poverty studies