1. CHAPTER 6: PRICES

2. A Balanced Market Equilibrium—the point at which quantity demanded and quantity supplied are equal. $ QTY D S

3. EXCESS DEMAND Occurs when quantity demanded is more than quantity supplied When the actual price in a market is below the equilibrium. –Buyers encouraged –Sellers discouraged Sellers will continue to raise prices until demand diminishes –Search for the highest price market will bear. $ QTY D S EXCESS

4. Problems with Excess Demand Shortage- situation in which quantity demanded is greater than quantity supplied; also known as excess demand Search Costs- the financial opportunity costs consumers pay when searching for a good or service

5. EXCESS SUPPLY Occurs when quantity supplied exceeds quantity demanded. Any price above the equilibrium point. D S $ QTY EXCESS

6. Price Ceiling $ QTY D S The maximum price for a good or service The price is held below the equilibrium price so it will not climb higher. ( A price ceiling is created) Rent in large cities can be like this to make sure the price is still affordable Example pg 129

7. Effective and Ineffective Price Ceilings The ineffective price ceiling will not be met not really necessary – and will not effect price The effective price ceiling will officially affect the price, but what will happen? quantity supplied will be less than quantity demanded – there is a SHORTAGE

8. Price Floor $ QTY D S The price is not allowed to drop below a certain price. ( A price floor is created) Examples: Minimum Wage – sets a minimum price an employer can pay a worker for each hour of labor Government buying up crops when prices of crops falls below the price floor

9. REPORT Select one of the Fortune 500 companies, as listed—no duplicates—first come, first served.Fortune 500 companies 3 page report—taking one product/product line from this company and analyzing how they use/used supply and demand to determine the price level of the product.

10. REPORT Parts of the report: –Brief company and product history. –Price history—make sure you compare to size of the product when necessary. –How has market equilibrium changed and how did this affect the supply and demand for the product in question. What made these changes—be specific –What happened after, or what is going to happen with this product. –Include a graph showing the effects that shifts in supply and demand had on the product.

11. Market Scenario #1 Producers of the cassette tape after the introduction of the CD player. What caused the shift? $ QTY D¹D¹ S¹S¹

12. The government cuts back the taxes on diesel fuel— what happens for Van Wyk Trucking? What caused the shift Market Scenario #2 $ QTY D¹D¹ S¹S¹

13. Market Scenario #3 It has been reported that coconut oil is found to be the elixir needed for youthful health and appearance. What caused the shift? $ QTY D¹D¹ S¹S¹

14. Market Scenario #4 The GI Joes with the kung fu grip is “the” toy to have as Christmas approaches. What causes the shift? $ QTY D¹D¹ S¹S¹

15. The Role of Prices The free market economy is the most efficient way to distribute, regulate, and allocate goods. This is done with prices Imagine what it would be like without prices—trying to acquire products and services.

16. Advantages of Prices Price as an incentive –Prices serve as a sign to buyers and sellers. –How to adjust. –Direction to adjust

17. Advantages of Prices Prices as Signals –When to get into the market and when to get out. –Consumers— when to buy and when to wait.

18. Flexibility –Prices are used to adjust supply. Easier than changing production. –Supply Shock—a sudden shortage of a good –Rationing—a system of allocating scarce goods and services using criteria other than price. Advantages of Prices

19. Supply Shocks Negative Supply Shock – when an outside event quickly shifts the supply curve inward. A sudden surprise event that increases or decreases output temporarily.

20. Famous Supply Shocks Oil Embargo 1970’s. Sept. 11 Hurricane Katrina 2008 credit crisis

21. Advantages of Prices Price System is free –No administration costs –Decisions made by dollar vote vs. a controlled economic system.

22. Variety of Choices Many choices of price and quality vs. a command economy. Price controls rarely necessary in market economy. Black Market-allows consumers to pay more so they can buy a good when rationing makes it otherwise unavailable.

23. Market Problems Imperfect competition –Cause high prices Spillover costs (externalities)—costs of production that affect people who have no control over how much of a good is produced. Imperfect information

24. Ty Beanie Babies http://www.aboutbeanies.com/marketing.html