P $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 Qs Qd ???

In a market with no government interference, what will the price of a cup of coffee end up being?

P $5.00 $4.00 $3.00 $2.00 $ Q S D Equilibrium Point Qs = Qd

Do suppliers automatically know where equilibrium is, and charge that price all the time? What happens if they charge a price that is higher or lower than equilibrium?

P $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 Qs Qd Surplus / Shortage

P $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 Qs Qd Surplus / Shortage Qs – Qd = 0 PEPE Surplus Shortage

P $5.00 $4.00 $3.00 $2.00 $ Q S D How do I know if the equilibrium price and quantity I have calculated are correct? P E = $2.30 Q E = 46

1. Change in the cost of inputs Land, labor, capital 2. Change in Productivity 3. Change in Technology Ask Henry Ford… 4. Change in Number of Sellers Duh. 5. Change in Taxes or Subsidies 6. Change in Market Expectations Future prices/demand/con ditions 7. Change in Government Regulation

1.Change in Income mo’ money = mo’ problems purchases 2.Change in Prices and Availability of Substitutes ex: Pens and Pencils 3.Change in Prices and Availability of Complements ex: Paper and Pencils 4.Change in Weather or Seasons ex: Shorts in winter, Sleds in summer, Gas? 5.Change in Number of Buyers ex: larger/smaller market, population change, technology 6.Change in Styles, Tastes, Habits, Preferences fashion, coolness, trends – ex: 7.Change in Expectations future oriented – ex: harvest, technology

Recently the price of beef rose. Use graphs to show that the increase in price could be consistent with the following. Be sure to draw a graph and provide a brief explanation for each situation. Include a potential reason for the change. Quantity of beef consumed falls Quantity of beef consumed rises Q of beef stays the same

Price Floor Price Ceiling Price Fixing

If the government fixes a price above equilibrium, it acts as a price floor. If the government fixes a price below equilibrium, it acts as a price ceiling.

P $5.00 $4.00 $3.00 $2.00 $ Q S D P F = $3.25 Surplus of 45 Price Floor

Effect: Surplus Why might the government set a price floor? To compel production Examples: Agriculture, Minimum Wage Downside? Double Whammy… Consumers pay more Taxpayers can take a hit Inefficient - Overallocation of resources Society says resources would be better used elsewhere

P $5.00 $4.00 $3.00 $2.00 $ Q S D P C = $1.25 Shortage of 59 Price Ceiling

Effect: Shortage Why might the government set a price ceiling? Social reasons – keep consumers from being rationed out of the market (especially for needs) Examples: Rent controls, Electricity What happens when there is a shortage of concert tickets or Pirates playoff tickets (due to self imposed price ceilings)? Black Market!!! Inefficient - Underallocation of Resources Society doesn’t get as much as it wants

P Q S2S2 S1S1 D1D1 P1P1 P0P0 Q1Q1 Q2Q2 Q3Q3 Supply of Organs Shortage at Zero Price Q 1 – Q 3 At Price P 1 the Shortage is Reduced By Q 1 – Q 2 Demand for Organs 3-22

Waiting list for transplants Demand for organs Supply of organs—two possibilities Market eliminates shortage Moral objections Legalize and regulate? 3-23

1.Rationing effect of prices a.Effect of surplus b.Effect of shortage c.Market Clearing Price/Quantity i. Where supply = demand 2.Supply Shifts a.Effect on P and Q 3.Demand Shifts a.Effect on P and Q 4.Combined Shifts a.One of P or Q will probably be indeterminate 5.Price controls a.Ceilings i. Why set them? ii. Result? b.Floors i. Why set them? ii. Result?