Demand, Supply, and Prices Chapter 6

Section #1 Key Terms: Market equilibrium Equilibrium price Surplus Shortage Disequilibrium Market equilibrium-quantity demanded and the quantity supplied at a particular price are equal Equilibrium price- the price at which the quantity demanded and the quantity supplied are equal. Surplus- the result of quantity supplied being greater than quantity demanded Shortage- the result of quantity demanded being greater than quantity supplied Disequilibrium- quantity demanded and quantity supplied are not in balance -

Section #1 How do we get market equilibrium and equilibrium price? Demand and supply interact to determine equilibrium price -businesses must experiment with different prices to get their data which then determines the market equilibrium and equilibrium price -Book example with sandwiches: She doesn’t want to charge too much so that she has tons left over and has to throw them away and doesn’t want to charge too little so that she runs out and can’t keep up with the demand -Explain how she doesn’t want any left over and doesn’t want to run out, consumers may not be willing to pay higher pirces even if they like the idea of a hot sandwich for lunch

Section #1 What causes surplus, shortage, disequilibrium? When there is a surplus prices tend to fall -shortage raise prices -tickle me elmo: it was not really that hot of a toy until the tv started to promote it. Then everyone had to have it but producers couldn’t produce fast enough b/c their plants were in asia and so when the stores finally got the toys they had a surplus but it was after christmas. Initially they tried to sell them for the same holiday price but people wouldn’t buy them at that price so they had to decrease their price. -suppliers usually reduce prices b/c they have a surplus -the market always moves toward equilibrium sometimes it takes a while.

Disequilibrium Always working our way back to equilibrium -this is the new equilibrium price- -determinants of demand: tastes preferences, income, consumer expectations, market size, substitutes, complements, substitutes

The same works for supply Determinants of supply: Input costs, productivity, tech, government action, producer expectations, number of producers

Equilibrium Prices Consumers want less or producers supply more prices fall Consumers want more or producers supply less, prices rise

Section #2 Key Terms Competitive Pricing Incentive -producers sell products at lower prices to lure customers away from rival producers, while still making a profit. Remember the simulation? -competitive pricing- producers sell products at lower prices to lure customers away from rival producers while still making a profit Incentive- encourages people to act in a certain way

Section #2 Competitive Pricing Examples? Swim suites- some are selling for $15 some for $30 -one store has it for 30 but another decides to sell their for 15 b/c they have a lower price hope to sell more than the other store.

Characteristics of Price System It is neutral It is market driven It is flexible It is efficient

Prices Motivate Producers/Consumers Provides information Shows if the producers should enter a market or not Shortage signals increase prices Provides motivation Motivated to enter the market at higher prices -falling prices and the possibility of losses motivate them to leave the market, but increasing prices they enter -

Prices Motivate Producers/Consumers Surpluses (lower prices)= time to buy High prices=not the time to buy Remember inferior and normal goods? Price influences buying habits -high price signals product is in short supply or has a higher status. Buy inferior goods only when they cannot afford something better.

Michael Dell Beat the Competition Efficient Internet

Section # 3 Key Terms Price Ceiling Price Floor Minimum wage Rationing Black market price ceiling- legal max price that sellers can charge for a product Price floor- minimum price that buyers must pay Minimum wage- legal minimum wage amount that an employer must pay for one hr of work Rationing- govn’t system for allocating goods and services using criteria other than price ( Black market-involves illegal buying or selling violation of price controls or rationing.

Price Ceilings Stops prices from going up (balloon goes up what stops it?) Rent Price ceiling- legal maximum price that sellers may charge for a product -Rent- there is no incentive to increase the number of rent-controlled housing so we get a shortage -landlords don’t want to put money into the units b/c they aren’t making that money up

Price Floors A minimum price that buyers must pay for a product You can’t go below the floor Milk, corn, etc Minimum wage -if the min wage is set too high above equilibrium then employers may decide that paying the higher wage is not profitbale they might higher fewer employees, unemployment increases. -if it is set below the equilibrium it has no effect

Rationing/Black Market WWII rationing Look for substitutes during rationing Ex? North Korea -black market examples?

Section # 4 Libya unrest Consumer Demand Japan Entering the travel season Summer Japan Used nuclear power (that’s now not an option) Must look to oil http://hmcurrentevents.com/articles/economics_spotlight/upheaval_in_libya_causes_oil_p.php