Presentation on theme: "Unit 2 – Demand and Supply Price Ceilings and Price Floors"— Presentation transcript:
1 Unit 2 – Demand and Supply Price Ceilings and Price Floors Economics 12Unit 2 – Demand and SupplyPrice Ceilings and Price Floors
2 More on Demand and Supply Under what circumstances do the forces of demand and supply determine the price of products?Only in a “perfectly competitive” marketExistence of bigness in the marketplace limits the efficient working of the market.Laws of demand and supply are not scientific laws.Alfred Marshall said “Economic laws are social laws – statements of tendencies, more or less certain, more or less definite”Perfectly competitive – a market in which there are no big dominant firms and no interference by the governmentBigness – big corporations, big trade unions, big governmentsWhenever there is a powerful participant or a group of participants buying or selling in the market, the benefits of competition will be seriously reduced.Big firms cannot ignore the market and charge whatever prices they want. SUV example.
3 Determinants of Demand and Supply Consumer preferenceConsumer incomesPrices of related producersExpectations of future prices, incomes, or availabilityPopulationIts size, income distribution, and age distributionDeterminants of SupplyPrices of productive resourcesBusiness taxesTechnologyPrices pf substitutes in productionFuture expectations of suppliersNumber of suppliersThese all cause the Demand and Supply curves to shift either left (decrease) or right (increase).
4 Increases in Demand and Supply D P QS P QBoth changes tend to push up the quantity traded. However, the increase in demand will push the price up , whereas the increase in supply will push the price down.Therefore, increases (decreases) in both demand and supply will cause the quantity to increase (decrease), but the effect on the price is indeterminate.Higher demand leads to higher equilibrium price and higher equilibrium quantity.Higher supply leads to lower equilibrium price and higher equilibrium quantity.
5 Increases in Demand and Supply Both changes in isolation, tend to push up the quantity traded. However, the increase in demand will push the price up, whereas the increase in supply will push the price down.Therefore, increases (decreases) in both demand and supply will cause the quantity to increase (decrease), but the effect on the price is indeterminate.
6 Demand and Supply Moving in Opposite Directions When demand and supply move in opposite directions, the price will always move in the same direction as the demand change, but the effect on the quantity is indeterminate.
7 The Price SystemThe market system, also called the price system, performs two important and closely related functions :Price RationingResource Allocation
8 Price RationingPrice rationing is the process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied.
9 Price RationingA decrease in supply creates a shortage at P0. Quantity demanded is greater than quantity supplied. Price will begin to rise.The lower total supply is rationed to those who are willing and able to pay the higher price.
10 Price Rationing There is some price that will clear any market. The price of a rare painting will eliminate excess demand until there is only one bidder willing to buy the single available painting.
12 Price ControlsGovernments introduce price controls to correct what they see as undesirable market prices.A price ceiling is a maximum price that sellers may charge for a good, usually set by government.Price ceilings cause shortages.Government believes present market price too high for many buyersRent controlNational emergenciesGovernment establishing limits; not establishing a fixed price.
13 Allocation Mechanisms Allocation mechanisms are used to allocate products that are in short supply.The marketFirst come, first servedQueuing is a nonprice rationing system that uses waiting in line as a means of distributing goods and services.
14 Allocation Mechanisms Producers’ preferencesFavored customers are those who receive special treatment from dealers during situations when there is excess demand.RationingRation coupons are tickets or coupons that entitle individuals to purchase a certain amount of a given product per month.The problem with these alternatives is that excess demand is created but not eliminated.
15 Allocation Mechanisms In 1974, the government used an alternative rationing system to distribute the available supply of gasoline.At an imposed price of 57 cents per gallon, the result was excess demand.
16 Allocation Mechanisms A black market is a market in which illegal trading takes place at market-determined prices.
17 Allocation Mechanisms No matter how good the intentions of private organizations and governments, it is very difficult to prevent the price system from operating and to stop the willingness to pay from asserting itself.With favored customers and black markets, the final distribution may be even more unfair than that which would result from simple price rationing.
18 Prices and the Allocation of Resources Price changes resulting from shifts of demand in output markets cause profits to rise or fall.Profits attract capital; losses lead to disinvestment.Higher wages attract labor and encourage workers to acquire skills.At the core of the system, supply, demand, and prices in input and output markets determine the allocation of resources and the ultimate combinations of things produced.
19 Supply and Demand Analysis: An Oil Import Fee At a world price of $18, imports are 5.9 million barrels per day.The tax on imports causes an increase in domestic production, and quantity imported falls.
20 Price FloorsA price floor is a minimum price that sellers may charge for a good, usually set by government.Price floors cause surplusesGovernment assisting producers and not the consumerAgricultureAnother price control but with the opposite effect.
21 Dealing with a SurplusHow do you get rid of the surplus that a price floor inevitably produces?Store itConvert itLikely to be expensiveSell it abroad at reduced pricingTermed dumpingForbidden by many international conventionsDonate itDestroy it
22 The Minimum Wage Another type of price floor Minimum wage is the lowest rate of pay per hour for workers, as set by government.Scenario:Higher wage means employers are forced to economize on labour and will cut back on employment (quantity of labour demanded falls)Higher wage attracts more workers (quantity of labour supplied increases)Net result = surplus of labour (unemployment)All methods of allocation, whether done by government or by the market, impose costs. These costs are not always obvious. What economic analysis does is to help us identify and understand the nature of these costs.
23 Stop Here for Today For a recap of today’s lesson, try: