Equilibrium price

Interaction of Demand & Supply Demand is the willingness to buy a good or service and the ability to pay for it Supply is the desire and the ability to produce and sell Markets are the place where buyers and sellers come together  Same place where supply and demand interact

As buyers and sellers interact the market moves toward market equilibrium  a situation in which the quantity demanded of a good or service at a particular price is equal to the quantity supplied at that price Equilibrium price is the price at which the quantity of a product demanded by consumers and the quantity supplied by producers are equal

Example A sandwich shop near an office park new product at lunchtime— prepared salads On the first day, make 40 salads and offers them at $10 each  Only sell 10 and dispose the rest

Example cont. Next day, lower the price to $4 each and make only 15 salads  Learn 35 costumers want salads at the new lower price Try different combinations until you realize at $6 per salad you have market equilibrium When you have either too many or too few salads, your motivated to change the price

Surplus Surplus is the result of quantity supplied being greater than quantity demanded

Shortage Shortage is the result of quantity demanded being greater than quantity supplied

Tickle Me Elmo Toys are great examples of surplus and shortages especially during the holiday season Toys are fads and children's views change rapidly In 1996, Tyco Toys Inc introduced tickle me Elmo  500,000 for the holiday season  Priced at $30 Sales started slow  Tyco thought the toy was a bust  Then advertising increased, from popular television personalities  Making the product the must have toy of the season

Tickle me Elmo cont. Sales increase drastically  Prices rose  Supposedly some were sold as much as $1500 Tyco tried to increase supply but the factory was located in Asia Shortage persisted through holiday season By spring the supply doubled  The fad ended  Consumers reluctant to buy, resulting in a surplus  Lowering the price to $25

Equilibrium Price Demand Supply Equilibrium Price or Demand Supply Equilibrium Price or

SECTION 2 Prices & Profits

How the Price System Works More producers in a market increase supply  Leads to increased competition  Lower equilibrium price Competitive pricing- occurs when producers sell products at lower prices to lure customers away from rival producers, while still making a profit  By entering a market at a lower price, a new supplier can add to its customer base while it maintains overall profits by selling more units

Prices Motivate Producers and Consumers The laws of supply and demand show that consumers and producers have different attitudes toward price  Producers want to sell at high prices  Consumers want the best product for the lowest price For producers the price system provides…  Both information and motivation

Example Prices and Producers Information: prices act as signals to producers about whether it is a good time to enter or leave a particular market  Rising prices and profit expectation motivates producers to enter a market  Falling prices and possibility of losses lead for producers to leave a market

Example Prices and Producers A shortage in a market is a signal that consumer demand is not being met by existing suppliers  Not enough Tickle-me-Elmo’s  Prices are too low relative to quantity of demand Producers will look at this to raise prices  Encourages producers to enter market because higher prices will lead to increase of profit  As more producers enter the market, quantity supplied increases

Example Prices and Producers Surplus occurs when prices are too high relative to consumer demand  Producers can respond by either reducing prices OR by reducing production  Prices drop it signals a good time for producers to leave the market Sometimes, less efficient producers leave a market completely, as increased competition and lower prices drive them out of business

Shortage and Surplus for Producers Shortage Low Supply + High Demand = Prices Surplus Prices High + Low Consumer = Prices OR Supply Demand

Example Prices and Consumers Also act as signals and incentives for consumers  Surplus will lead to lower prices which means for consumers that it is a good time to buy  Producers will provide advertisements like store display to draw in consumers  Producers will inform consumers that the low prices won’t last High prices generally discourage workers from buying  Might indicate to switch to a substitute at a lower price  High prices may indicate short supply OR a high status

Example Hollister Co  They are selling a lifestyle.  A way to live and only have a small amount of supply to offer people who can pay for this lifestyle No LOGO video