Chap. 6.1 Market Forces

Market Equilibrium Equilibrium- when the quantity consumers are willing and able to buy equals the quantity that producers are willing and able to sell

Surplus The amount by which quantity supplied exceeds quantity demanded. A surplus usually forces the price down.

Shortage The amount by which quantity demanded exceeds quantity supplied. A shortage usually forces the price up.

Market Exchange Remember that markets answer the basic economic questions of what to produce, how to produce it, and for whom to produce it. Although each individual pursues his or her own self-interest, the “invisible hand” of market competition promotes the general welfare.

Market Exchange First of all, market exchange is voluntary in which both sides expect to benefit. Market prices serve as signals to both buyers and sellers about the relative scarcity of the good.

Transaction costs Transaction cost- this is the cost of time and information needed to carry out market exchange. Markets reduce these transaction costs. How??

Chap. 6.2 Shifts of Demand and Supply Curves

Shifts of the Demand Curve What could shift the demand curve? 1. An increase in consumers income 2. An increase in the price of substitute goods. 3. A change in consumer expectations. 4. A growth in consumer population. 5. A change in consumer taste.

Increase in Demand Increase in Demand- this means that consumers are more willing and able to buy the product at every price. Note: This increase in demand would not affect the supply curve. A rightward shift of the demand curve increases both price and quantity (As long as the supply curve slopes upward)

Decrease in Demand Decrease in Demand- this means that consumers are less willing and able to buy the product at every price. A leftward shift of the demand curve reduces both price and quantity (As long as the supply curve slopes upward).

Shifts of Supply Curve What could shift the Supply Curve? 1. A reduction in the prices of resources 2. A decline in the price of another good that those resources could make 3. A technological breakthrough 4. A change in producers expectations 5. An increase in the # of producers

Increase in Supply Increase in Supply- when producers are more willing and able to supply the product at every price. A rightward shift of the supply curve reduces the price but increases the quantity (As long as the demand curve slopes downward).

Decrease in Supply Decrease in Supply- when producers are less willing and able to supply the product at every price. A leftward shift of the supply curve increases the price but reduces the quantity (As long as the demand curve slopes downward)

Managing Prices To keep market functioning smoothly the gov’t may: 1. Price ceiling 2. Price Floors 3. Rationing

Price Ceiling Gov’t regulation that create a maximum price for a product producers can’t sell their goods above this price

Price Floors Gov’t regulation that sets minimum price for a product Example: minimum wage agricultural product

Rationing System in which the gov’t decides how to distribute producers products Example: wartime oil shortages

Side Effects: 1. unfair: one group may receive preferential treatment 2. expensive: take money to put system into place 3. Creates a black market: illegal exchange of goods

Price System Self-interest causes a conflict between consumers/producers How do producers/consumers communicate to over come this conflict? Prices

Price System A type of unspoken language between producers/consumers the helps to balance the forces of supply and demand

Benefits of the Price System 1. Information: Prices give the producers an idea of what to produce. without prices producers would not know what was the most profitable to make

2. Incentives: Prices gives consumers a reason (incentive) to buy products Ex: sales, rebates, coupons

Benefits of the Price System 3. Choice: Higher prices cause producers to offer more products 4. Efficiency: Wise use of resources With out prices the producers would not know what consumers are demanding

Benefits of the Price System. Flexibility: Prices can adapt and adjust quickly Ex:freeze wipes out a crop oil price hit record highs

Limitations on the Price System 1. Externalities: Effects on the prices that do not account for all of the cost and benefits of production 2 types: Positive: café opens near a sports arena Negative: plant not up holding its responsibility of controlling pollution

Limitations on the Price System 2. Public Good Items: Police, defense, fire Cost paid through taxes, if not some would refuse to pay even though they would still enjoy benefit

Limitations on the Price System 3. Instability: Huge price can occur between extremes Ex: hurricane hits the gulf coast = cost of bottled water/lumber sky rockets