The Price System ( Markets) ©2012, TESCCC Economics Unit 4, Lesson 1

Potential BuyersPotential Sellers Markets The interaction of buyers and sellers determines the price and quantity of most goods in a market system. ©2012, TESCCC

Buyers and sellers have opposite goals. Buyers want the lowest price. Sellers want the highest price. ©2012, TESCCC

Markets Draw Supply & Demand Demand Schedule $ QD Supply Schedule $ QS ©2012, TESCCC

Market D S $ EP EQ Q ©2012, TESCCC

With supply and demand both on graph, we now have a market. Market equilibrium – where quantity demanded and quantity supplied are equal ©2012, TESCCC

Based on 2 Assumptions 1.Everything in market has a price. 2.Price is best measure to answer the three basic economic questions. ©2012, TESCCC

Prices act as signals. Signals to adjust –Demand –Supply ©2012, TESCCC

Disequilibrium QS = QD This creates a shortage or a surplus. ©2012, TESCCC

Surplus A price above equilibrium creates a surplus. A surplus is when QS is greater than QD. ©2012, TESCCC

Surplus Excess Supply QS > QD D S P EP EQ Q QD QS 30 ©2012, TESCCC

Shortage A price below equilibrium created a shortage. Shortage is when QD is greater than QS. ©2012, TESCCC

Shortage Excess Demand QD > QS D S $ EP20 40 EQ Q QS QD 10 ©2012, TESCCC

Objectives 1.Identify the determinant that causes a change in equilibrium price. 2.Construct a market, and graph a change in supply and demand with new equilibrium. ©2012, TESCCC

What does it take to make a market? Buyer = demand Seller= Supply Draw a market and label P Q S & D EP & EQ ©2012, TESCCC

Product: Toothpaste S D $ EQ E EP Q ©2012, TESCCC

Show what would happen if Crest has a very successful ad campaign. Change in D? or Change in S? ©2012, TESCCC

Product: Toothpaste S D1D1 $ Q E1E1 EP 1 EQ 1 ©2012, TESCCC

Product: Toothpaste S D1D1 $ Q E1E1 E2E2 D2D2 EP 2 EP 1 EQ 2 EQ 1 ©2012, TESCCC

What happened to EP? Increased To EQ? Increased So we can generalize and say if… D  EP  EQ  ©2012, TESCCC

Show what would happen if the price of seaweed goes up. Change in D? or Change in S? ©2012, TESCCC

Product: Toothpaste S D1D1 $ Q E1E1 EP 1 EQ 1 ©2012, TESCCC

Product: Toothpaste S1S1 D1D1 $ Q E1E1 EP 1 EQ 1 S2S2 E2E2 EP 2 EQ 2 ©2012, TESCCC

This was caused by a change in the cost of inputs. Seaweed is a major ingredient of toothpaste. ©2012, TESCCC

What happened to EP? Increased To EQ? Decreased So we can generalize and say if… S  EP  EQ  ©2012, TESCCC

Show what would happen if a new machine can harvest seaweed faster and cheaper. Change in D? or Change in S? ©2012, TESCCC

Product: Toothpaste S D1D1 $ Q E1E1 EP 1 EQ 1 ©2012, TESCCC

Product: Toothpaste S1 D1D1 $ Q E1E1 EP 1 EQ1 EQ 2 S2 EP 2 ©2012, TESCCC

What happened to EP? Decreased What happened to EQ? Increased So we can generalize and say if… S  EP  EQ  ©2012, TESCCC

Show what would happen if the Surgeon General announced that toothpaste was harmful to your heart. Change in Demand or Change in Supply? ©2012, TESCCC

Product: Toothpaste S1 D1D1 $ Q E1E1 ©2012, TESCCC

Product: Toothpaste S D1D1 $ Q E1E1 EP2 EQ 2 D2D2 EP1EP1 EQ 1 ©2012, TESCCC

What happened to EP? What happened to EQ? ©2012, TESCCC

Both decreased. We can generalize and say if… D  EP  EQ  ©2012, TESCCC