The Pricing System

Determining Prices: How a competitive market works ► Market Equilibrium (AKA market clearing price)-- the price where the amount sellers are willing to supply equals the amount buyers are willing to buy.  both forces are in balance; buyers and sellers are happy. ► Surpluses—when the quantity supplied exceeds the quantity demanded at the price offered ► Shortages—when the quantity demanded exceeds the quantity supplied at the price offered

Determining Prices: Equilibrium Price

Determining Prices: Shortages & Surpluses ► Shortages ► Surpluses

Managing Prices ► gov’t sometimes sets prices to protect producers/ consumers from dramatic price swings ► Price Ceilings (maximum price)-gov’t establishes a maximum price for a particular good. Prices above it are illegal to buy or sell; not very common  can be used to stop business from gouging customers protects consumers  Example is rent control, interest rates ► Price Floors (minimum price)-gov’t establishes a minimum price for a particular good; prices below it are illegal to buy or sell; more common  most commonly seen in agriculture, minimum wage protects producers usually  most economists are opposed to price fixing, upsets natural balance ► Rationing—gov’t or other institutions decides how to distribute a product.  distributed by policy, not supply & demand  rare in U.S.; usually during war or crisis (oil embargo) ► done with coupons  sporting events; playoffs to season ticket holders, colleges to students, alumni  Consequences of rationing 1. unfairness—public left out or not prioritized 2. cost—expensive to implement 3. black markets—encourages goods to be exchanged illegally  ticket scalpers  results in criminal selling of fakes/ nock-offs

Managing Prices: Price Ceilings & Price Floors ► Price Ceilings  Gov’t sets max price below the equilibrium ► Price Floors  Gov’t sets min price above equilibrium

Questions ► What is a shortage? What conditions will cause a shortage? How can you correct a shortage? ► What is a surplus? What conditions will cause a surplus? How can you correct a surplus? ► In a competitive market, if the level of demand stays constant, what will happen to the price if supply increases? Why? If supply decreases? Why? ► In a competitive market, if the level of supply stays constant, what will happen to the price if the demand increases? Why? If the demand decreases? Why? ► Give a real world example of a surplus or shortage you are aware of and explain in microeconomic terms how the shortage or surplus occurred?