1. INTERACTION OF DEMAND AND SUPPLY
SEEKING EQUILIBRIUM
DEMAND
SUPPLY
INTERACTION OF DEMAND AND SUPPLY

2. What is market equilibrium? What is equilibrium price?
OCCURS WHEN QUANTITY DEMANDED AT A PARTICULAR PRICE = QUANTITY SUPPLIED AT THAT PRICE
PLACE WHERE THE MARKET IS IN BALANCE; PRICE AT WHICH QUANTITY DEMANDED = QUANTITY SUPPLIED

3. BECAUSE THE QUANTITY DEMANDED = THE QUANTITY SUPPLIED
PRICE PER COOKIE ($)
QUANTITY DEMANDED
QUANTITY SUPPLIED
2.00 10 50
1.75 20 40
1.50 30
1.25
1.00
According to the Market Demand and Supply schedule ABOVE, what is the equilibrium price?
How do you know?
$1.50
BECAUSE THE QUANTITY DEMANDED = THE QUANTITY SUPPLIED

4. Now draw the Market Demand and Supply Curve.
Label the equilibrium price.
$2.25
PRICE PER COOKIE
$2.00
$1.75
$1.50 EP
$1.25
$1.00 10 20 30 40 50 60
NUMBER OF COOKIES
EQUILIBRIUM PRICE (EP) = $1.50

5. EQUILIBRIUM PRICE IN REAL LIFE
EQUILIBRIUM PRICE IN REAL LIFE

6. PRICES AS SIGNALS AND INCENTIVES:
What is competitive pricing?
WHEN SELLERS SELL GOODS AND SERVICES AT PRICES THAT BEST BALANCE THE TWIN DESIRES OF MAKING THE HIGHEST PROFIT AND LURING CUSTOMERS AWAY FROM RIVAL PRODUCERS

7. NEUTRAL- MARKET DRIVEN- EFFICIENT- FLEXIBLE-
What are the characteristics of the Price System?
NEUTRAL-
Both the producer and the consumer make the choices that determine the equilibrium price.
MARKET DRIVEN-
Market forces, not govt. policy, determine prices. In effect, the system runs itself.
EFFICIENT-
Resources are allocated efficiently since prices adjust until the maximum number of goods and services are sold.
FLEXIBLE-
When market conditions change, so do prices.

8. How do prices motivate consumers?
WHEN PRICES ARE LOW OR ADVERTISED AS BEING LOW, CONSUMERS KNOW IT’S TIME TO BUY
How do prices motivate producers?
WHEN PRICES ARE HIGH, PRODUCERS ARE MOTIVATED TO INCREASE SUPPLY; WHEN THEY ARE LOW, THE DECREASE SUPPLY.

9. INTERVENTION IN THE PRICE SYSTEM: What is a price ceiling?
AN ESTABLISH MAXIMUM PRICE SELLERS MAY CHARGE FOR A GOOD OR SERVICE
Why are price ceilings used?
TO PREVENT THE PRICE OF A GOOD OR SERVICE FROM GETTING TOO HIGH
Ex. College football tickets

10. AN ESTABLISH MINIMUM PRICE BUYERS MUST PAY FOR A GOOD OR SERVICE
What is a price floor?
AN ESTABLISH MINIMUM PRICE BUYERS MUST PAY FOR A GOOD OR SERVICE
Why are price floors used?
TO INCREASE INCOME TO CERTAIN PRODUCERS
(Ex. Minimum wage)

11. GOVT. ALLOCATES GOODS & SERVICES USING FACTORS OTHER THAN PRICE
What is a rationing?
GOVT. ALLOCATES GOODS & SERVICES USING FACTORS OTHER THAN PRICE
When & why has it been used in the US?
DURING WWII FOR SCARCE GOODS SO THAT THE GOODS COULD BE DISTRIBUTED TO EVERYONE NOT JUST THE WEALTHY

12. What is black market?
GOODS & SERVICES ARE ILLEGALLY BOUGHT & SOLD IN VIOLATION OF PRICE CONTROLS OR RATIONING