1. Price Systems At Work
Econ 10/4

2. Warm Up
What makes someone a good negotiator? When might you need to negotiate prices in your future (as a buyer or as a seller)?

3. Price Prices serve as a link between buyers and sellers.
Help to answer the What, How, and For Whom
In competitive markets prices are “neutral”—they don’t favor a consumer or producer in general
In market economies prices are flexible—they can be affected by many unexpected events such as war, natural disasters, change in political leadership, trends, technology etc.
Sellers hope for high prices and large profits
Buyers hope for low prices and quality products

4. Supply and Demand Analysis
Easy as 1, 2, 3
Before the change:
Draw supply and demand
Label original equilibrium price and quantity
The change:
Did it affect supply or demand first?
Which determinant caused the shift?
Draw increase or decrease
After change:
Label new equilibrium?
What happens to Price?
What happens to Output (Quantity)?

5. Market Equilibrium Price $25 22 4 $20 18 9 $15 13 $10 20 $5 6 25
Market Equilibrium: where supply is equal to demand
Graph the following supply and demand schedules onto the same set of axes.
Price
Quantity Supplied
Quantity Demanded
$25 22 4
$20 18 9
$15 13
$10 20 $5 6 25

6. Surplus/Shortage
Surplus: Quantity supplied is greater than quantity demanded
Ex. If the price was $4
Shortage: Quantity supplied is less than quantity demanded
Ex. If the price was $1
Equilibrium Price: is the price that leaves neither a surplus or a shortage

7. Changes in Demand
Draw a generic supply and demand graph for coffee. Don’t forget labels!
Scenario: The price of tea has increased.
1. Effect on demand/why?:
2. Effect on equilibrium price:
3. Effect on equilibrium quantity:

8. Changes in Supply Draw a generic supply and demand graph for cakes.
Scenario: The price of flour has increased.
1. Effect on supply/why?:
2. Effect on equilibrium price:
3. Effect on equilibrium quantity:

9. Competitive Price Theory
The advantage of a competitive market is that it allocates resources efficiently
As sellers compete for buyers, they are forced to lower their prices while keeping the product in good quality. At the same time the competition amongst buyers helps prices from falling too low
This is called “laissez faire” economics which means the market “runs itself” and will correct itself