Markets, Equilibrium, & Price How Do You Know When the Price is Right?

Preview 1.Think of a product you recently purchased. 2.On your handout, record the name of the product and the approximate price you paid. Then answer these questions: a.What are some reasons you were willing to buy the product at this price? b.What are some reasons the seller was willing to sell the product at this price? c.Do you think you paid the “right” price for this product? Why or why not?

What Happens When Demand and Supply Meet? In a free market, demand and supply work together to determine price. The interaction of demand and supply drives prices to market equilibrium: Quantity consumers are willing to buy = Quantity producers are willing to sell

Reaching Market Equilibrium On a graph, equilibrium is found at the point where the demand and supply curves interact PriceWatermelons Demanded Watermelons Supplied $ Graph the Supply & Demand for Watermelons

Reaching Market Equilibrium Graph the Supply & Demand for Watermelons PriceWatermelons Demanded Watermelons Supplied $

DEMAND. SUPPLY Equilibrium Price Equilibrium Quantity Price Quantity of Watermelons

So, What is Market Price? Market Price is the price a willing consumer pays to a willing producer for the sale of a good or service. Supply and Demand are like a pair of scissors – it is impossible to determine which blade cuts that paper – the two blades operate in unison.

What Happens When the Price Isn’t Right? Equilibrium Price = “Right” price What happens when producers set a market price that is above or below the equilibrium price? Disequilibrium

Smoothie Demand & Supply Schedule PriceQuantity Demanded Quantity SuppliedOutcome $1.505,0001,000 $2.004,0002,000 $2.503,000 $3.002,0004,000 $3.501,0005,000 Graph Your Demand and Supply Curves Shortage from Excess demand Equilibrium Surplus from Excess supply

Smoothie Demand & Supply Schedule PriceQuantity Demanded Quantity SuppliedOutcome $1.505,0001,000 $2.004,0002,000 $2.503,000 $3.002,0004,000 $3.501,0005,000 Graph Your Demand and Supply Curves Shortage from Excess demand Equilibrium Surplus from Excess supply

Smoothie Demand and Supply ,000 6,000 PriceQuantity Demanded Quantity Supplied $1.505,0001,000 $2.004,0002,000 $2.503,000 $3.002,0004,000 $3.501,0005,000 S1 D1 Surplus Shortage

How Do Shifts in Demand of Supply Affect Markets? Does the event affect demand, supply, or both? A new study is published saying blueberries are good for you Does the event shift the demand or supply curve right or left? The demand curve shifts to the right What are the new equilibrium price and quantity and how have they changed as a result of the event? New equilibrium price is $3.00, new quantity is 4,000

Smoothie Demand and Supply ,000 6,000 PriceQuantity Demanded Quantity Supplied $1.505,0001,000 $2.004,0002,000 $2.503,000 $3.002,0004,000 $3.501,0005,000 S1 D1 D2

How Do Shifts in Demand of Supply Affect Markets? Does the event affect demand, supply, or both? Blueberry crop damaged by drought Does the event shift the demand or supply curve right or left? Supply curve moves to the left What are the new equilibrium price and quantity and how have they changed as a result of the event? New equilibrium price is $3.00, new quantity is 2,000

Smoothie Demand and Supply ,000 6,000 PriceQuantity Demanded Quantity Supplied $1.505,0001,000 $2.004,0002,000 $2.503,000 $3.002,0004,000 $3.501,0005,000 S1 D1 S2

How Government Intervention Affects Markets Price Ceilings: lead to excess demand – Maximum price consumers are required to pay for a good or service – Price above the ceiling is illegal Ex: Rent Control

Blueberry Market Breaking News! The U.S. government has just announced a price ceiling on blueberries. All blueberries must be bought and sold for $3 or less per box. Graph it on your handout Start with equilibrium P = $6, Q = 5 Price ceilings cause: ______________ shortage

How Government Intervention Affects Markets Price Floors: lead to excess supply – Minimum price consumers are required to pay for a good or service – Pricing a good below the Price Floor is illegal Ex: Minimum Wage

Blueberry Market Breaking News! The U.S. government has just announced a price floor on blueberries. All blueberries must be bought and sold for $8 or more per box. Graph it on your handout Price floors cause ________________ surplus

Excess Supply and Demand Price Controls lead to surpluses and shortages Shortages = Rationing – Controlled distribution of a limited supply of goods or services Shortages = Black Market – Illegal market where goods and services are traded a quantities higher than those set by law

Homework Complete Worksheet Quiz on Supply & Demand next class!