Thoughts—Fill in blanks Consumers tend to demand (more/less) of a product when the price is low and (more/less) when the price is high. Producers tend to supply (more/less) of a product when prices are high and (more/less) when prices are low.

Determining Prices Market Equilibrium—Where the quantity supplied and quantity demanded for a product are equal at the same price. QD = QS –The needs of both supplier and consumer are satisfied. –The forces of supply and demand are in balance. –Question: How do producers know if their price is too high or too low? In other words, how do they know if the price they have set is at market equilibrium or not?

Surpluses Surplus—Exists when the quantity supplied exceeds the quantity demanded at the price offered. QD < QS –Producers are willing to supply more of a product at a higher price than consumers are willing to buy at that price, therefore there is “extra” product left over.

Price Quantity S D Surplus QS>QD

Shortages Shortages—Exists when the quantity demanded exceeds the quantity supplied at the price offered. QD > QS Consumers are wanting more product at a lower price than suppliers can profitably supply, therefore, there is no product left to sell. Who gets the product? How decided?

Price Quantity S D Shortage QS<QD

Shifts in Equilibrium Key: The equilibrium point also shifts to the new intersection of the curves Christmas season—Tickle Me Elmo has enormous demand with major shortages—What were the results?

Managing Prices Price Ceilings—A government regulation that establishes an artificial maximum price that is lower than market equilibrium for a particular good or service. Price Floors—A government regulation that establishes an artificial minimum level for prices that is higher than market equilibrium.

Consequences of Setting Prices Interfering with Supply/Demand can cause unintended consequences and impair equilibrium. Ex. Affordable housing--$600 ceiling/Equilibrium price is $800. –Supply of housing shrinks, Why? Profits—Up or down? New housing supply – Up or down? Condition of existing rental units?

Rationing Rationing– A system in which a government or other institution decides how to distribute a product. Ex. WW II—Tires, sugar, butter, coffee Ex. Cuba today under communism/socialism Ticket prices to football games (Supply/Demand)? Ration tickets to students to keep affordable Consequences: Unfair, Expensive, Creates black markets

Consequences of Rationing 1. Unfairness—Gives special treatment to students, alumni, etc. 2. Cost—Can be costly to implement Takes a lot of hours to track/Hire people. 3.Black Markets—Rationing tends to encourage illegal charging of higher than official prices for an event, product, (Unfair). (Opportunity for fakes).