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 widget 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 $4.00 $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

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

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/conditions 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

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 Double Whammy: Consumers pay more Taxpayers can take a hit Overallocation of resources No allocative and productive efficiency

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!!! Underallocation of Resources No allocative or productive efficiency

Waiting list for transplants Demand for organs Supply of organs—two possibilities Market eliminates shortage Moral objections Legalize and regulate? 3-20

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 3-21

Read pgs and complete elasticity of demand problems