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Chapter 6.1 Combining Supply and Demand Supply + Demand and balance Market Equilibrium Govt control of prices Price ceilings and Price floors.

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Presentation on theme: "Chapter 6.1 Combining Supply and Demand Supply + Demand and balance Market Equilibrium Govt control of prices Price ceilings and Price floors."— Presentation transcript:

1 Chapter 6.1 Combining Supply and Demand Supply + Demand and balance Market Equilibrium Govt control of prices Price ceilings and Price floors

2 Balancing the Market Combining Demand and Supply Schedules will allow a common ground to be found $ Q DQ S Equilibrium Shortage Surplus

3 Equilibrium Point at which demand = supply At equilibrium, market is stable If the points are anywhere else Market Disequilibrium Excess Demand Excess Supply

4 Q $ D S Equilibrium Shortage (excess demand) Surplus (excess supply)

5 Govt Intervention Govt regulation can include price ceilings and floors Price Ceilings - max price Rent control Creates greater demand

6 Govt Intervention Problems associated with Price Ceilings Long lists/lines Discrimination Bribery Abuse Limit on profits Cut costs/ maintenance

7 Govt Intervention Price floors - minimum price Minimum wage Gives everyone an incentive to work Can create a surplus of labor Employers not willing to hire as many employees at higher wages

8 6.2 Changes in Market Equilibrium How do prices change in the market New equilibrium with change in supply and demand

9 The market tends to move toward equilibrium More demand leads to higher prices Prices that are too high lead to less demand Too much surplus will cause a slash in prices Falling prices creates higher demand

10 Q D S Equilibrium Shortage Surplus 2.00 $ 200

11 Shifts in Supply Equilibrium - where supply equals demand A shift in the supply curve will create a new equilibrium point $ Q D S1 S2 If the price does not change, there will be a surplus To become balanced again, prices will drop New Equilibrium Is along the Demand curve, No shift in the demand curve

12 Equilibrium is always changing as markets change Technology is always improving Rebates and sales are a method of moving goods off the shelves

13 Shift in Supply When costs of production go up, supply goes down Curve shifts left D S1 S2 $ Q

14 Shifts in Demand If there is a sudden increase in demand Curve shifts to the right New demand is greater than supply Creates a shortage Search costs - financial and opportunity costs consumers pay in looking for a good

15 Shifts in Demand Goods that are available get distributed to different stores Creates long lines limits on how many may be purchased first come, first serve Bidding wars Price will continue to rise until Demand is met

16 Increase in Demand $ Q S D1 D2

17 Decrease in Demand After a fad, demand can drop as fast as it went up Now there is a surplus $ Q S D1 D2

18 The Role of Prices Prices in the Free Market Advantages to price based system Price based system leading to more choices and more efficient use of resources 6.3

19 Prices are key to Equilibrium Prices help move land, labor and capital to the producers and finished goods to consumers Without prices, there would be no consistent way to measure demand

20 Advantages 1. Price as incentive Communicate what goods are in short supply or more available Produce more or less 2. Price as signals If prices are high Producers willing to make more Consumers will buy less Low price Slow production Consumers buy more

21 Advantages 3. Flexibility Increase in demand will increase price Supply Shock - sudden shortage of a good How does the available supply get split up Raising price keeps only those who can afford a good in the market Rationing - dividing up goods using methods other than price Rationing is the basis of central planning

22 4. Wider Variety of Goods Prices allow consumers to pick from similar types of goods Soviet Union vs USA The Black Market - when people sell goods without regard for government controls on price or quantity Advantages

23 5. Efficiency Prices allow resources to be used where they are most valuable Where consumers want them to go Advantages

24 Adam Smith Businesses prosper by finding out what people want and making it Problems 1. Imperfect competition Monopolies, oligopolies 2. Spillover costs Costs that fall on others 3. Imperfect information May lead to a bad investment


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