Markets & Prices What If The Price Is Too High  sellers have incentive to produce a lot  buyers have incentive to consume a little  excess supply (surplus)  competition among sellers: P ↓  weeds out extra sellers, attracts additional buyers

Excess Supply

Markets & Prices What If The Price Is Too Low  buyers have incentive to consume a lot  sellers have incentive to produce a little  excess demand (shortage)  competition among buyers: P ↑  weeds out extra buyers, attracts additional sellers

Excess Demand

Gains From Trade Opportunity For Improvement  should a particular unit of a good be produced and consumed?  only if market participants can benefit from exchange  as long as someone is willing to pay more than it would cost a firm to produce the unit, then there are incentives to enter into the transaction

Gains From trade

Markets & Competition FTE Competition Regulates Markets  buyers and sellers both gain from exchange  prices adjust to encourage trade  competition directs goods & services (resources) to their most highly-valued uses

Shocks What If Market Conditions Change  suppose something other than the price of a good changes –price of inputs, technology –income, price of other goods, tastes & preferences  a change in market conditions will create a disequilibrium  the price adjusts to bring the quantity supplied and the quantity demanded into balance

Shocks Three Steps  does the event shift the supply curve or demand curve  to the left or to the right  use the S & D diagram to see how the shift affects the equilibrium price and quantity

Increase In Demand

Hot Weather  increased tastes & preferences  demand curve shifts to the right  shortage at initial equilibrium price  P ↑ to restore equilibrium  new equilibrium: higher P higher Q

Factors That Shift Demand

Recall…..  if more people want a particular product D ↑leads toP ↑  sends signal to producers that more is desired  sellers respond to incentive of higher prices  ethanol and corn  bellbottoms are all the rage this year  cowbells?

Decrease In Supply

Price Of Sugar Rises  increased price of input  supply curve shifts to the left  shortage at initial equilibrium price  P ↑ to restore equilibrium  new equilibrium: higher P lower Q

Factors That Shift Supply

Shocks

Efficiency The Invisible Hand  guides decision-making  rewards efficient producers and consumers  goods society wants  prices society is willing and able to pay

Equilibrium

University of Wisconsin-Eau Claire Markets in Action: Application 1 Two Sources Of Seasonal Variation  beachfront cottages  apples  identify period of highest consumption  will price be high or low?

University of Wisconsin-Eau Claire Markets in Action: Application 1

University of Wisconsin-Eau Claire Markets in Action: Application 2 Corn and Beef  D for corn (ethanol) has led to P  corn is main feed for cattle (used to produce beef)  What happens in the market for beef?  Atkin’s Diet has people wanting more beef…..  Mad Cow scare in Nebraska meat plant…..

University of Wisconsin-Eau Claire Markets in Action: Application 3 Nursing Shortage  nursing is traditionally a women’s occupation  new higher paying job opportunities for women  What happens in the market for nurses?  an aging population has led to D for medical services…  apply similar analysis to teachers, truck drivers…

University of Wisconsin-Eau Claire Markets in Action: Application 4 Taxes, Markets & Government Revenue  $1 tax on each unit sold in the marketplace  How successful will this be in gasoline market?  How successful will this be in the cigarette market?  now consider the market for footwear… –black Converse Chuck Taylor high-tops…

University of Wisconsin-Eau Claire Markets in Action: Other Questions  Why do houses ↑ in price after purchase, while automobiles ↓ in price after purchase?  How do consumers respond to price changes? –salt, public transportation, gasoline (what’s up with gas prices)  If there are more cranberries, how come the price is higher?  Why is there currently a shortage of nurses and truck drivers