2 BELLRINGERWhat would happen if the government decided gas prices should be lowered by $2.50 per gallon?
3 Section 1 – Combining Supply and Demand Balancing the MarketDefining EquilibriumGraphing EquilibriumDisequilibriumExcess DemandExcess SupplyGovernment InterventionPrice CeilingsThe Cost of Price CeilingsEnding Rent ControlPrice FloorsMinimum WagePrice Supports in Agriculture
4 Balancing the Market Market System Consumers can buy productions they wantSellers make enough profit to stay in businessSellers respond to changing needs of consumersTurning competing interests into a positive outcome for both sides
5 Balancing the Market Buyers and sellers come together in the market Combining Supply and DemandReview Demand SchedulePrice of goods compared to how much is producedReview Supply SchedulePrice of goods compared to how much is consumed
6 Demand and Supply Schedule Combined Supply and Demand SchedulePrice of a slice of pizzaQuantity demandedQuantity suppliedResult$ .50300100$1.00250150$1.50200200$2.00150250$2.50100300$3.0050350
7 Defining EquilibriumEquilibrium: The point at which quantity demanded and quantity supplied are equalBalance between price and quantityMarket is then stableThe amount produced will equal the amount consumed
8 Price of a slice of pizza Combined Supply and Demand Schedule Graphing EquilibriumPrice per sliceEquilibrium PointFinding EquilibriumPrice of a slice of pizzaQuantity demandedQuantity suppliedResultCombined Supply and Demand Schedule$ .50300100$3.50$3.00$2.50$2.00$1.50$1.00$.50Slices of pizza per day50150200250350SupplyDemand$2.00$2.50$3.0015010050250300350Surplus from excess supply$1.00250150Shortage from excess demand$1.50200EquilibriumEquilibrium PriceaEquilibrium Quantity
9 DisequilibriumDisequilibrium: a point when quantity supplied does not equal quantity demandedCreates excess demand or excess supply
13 Excess Supply At $2.50 per slice Creates a Surplus QD = 100 Slices QS = 300 SlicesCreates a Surplus
14 Combined Supply and Demand Schedule Price of a slice of pizza Analyze the DataCombined Supply and Demand SchedulePrice of a slice of pizzaQuantity demandedQuantity suppliedResult$ .50300100Shortage Occurs because QD > QS$1.00250150$1.50200200Equilibrium QD = QS$2.00150250Surplus Occurs because QD < QS$2.50100300$3.0050350
15 BELLRINGERCan you think of any products you buy that have recently changed in price?
16 Government Intervention Markets tend to reach equilibriumPrice Ceiling: a maximum price that can be legally charged for a good or servicePrice Floor: a minimum price for a good or service
17 Price Ceilings Rent Control Housing is essential but wages might not keep up with the supply and demand of housesReduces the quantity and quality of housing
18 Cost of Price CeilingsWhen price cannot rise to equilibrium, market determines who receives good or serviceBy setting price below equilibrium, profits are reducedCost cutting occursPoor quality homes/apartments
19 Ending Rent Control Landlords gain an incentive to maintain buildings What affect does it have on the number of apartments?Rent Graph
20 Price FloorsMinimum price set by the government to be paid for a good or serviceMinimum WageBase level pay for work
23 Price Supports in Agriculture Price floors are used for many farm productsGovernment would buy excess crops when price fell below floor
24 Section 2 – Changes in Market Equilibrium Changes in PriceUnderstanding a Shift in SupplyFinding a New EquilibriumChanging EquilibriumA Fall in SupplyShifts in DemandProblem of Excess DemandReturn to EquilibriumA Fall in Demand
25 Changes in Price Excess supply will cause firms to cut prices Falling prices cause QD to riseQS will fall until they meet againThese are changes ALONG the supply or demand curve… not shifts
26 Changes in Price What shifts the supply curve? Technology ChangeNew taxes/Subsidies by GOVTInput costs changeBecause they want to be at equilibrium, curve shifts will create a new equilibrium price and quantity
27 Understanding a Shift in Supply Falling prices affect on supplyCD players were expensive initiallyNow less than $100 and compete with MP3 or digital musicFall in production costs shifts supply curve to the right
28 Shifts in Supply Graph A: A Change in Supply $800 $600 $400 $200 Price PriceOutput (in millions)Graph A: A Change in Supply12345Original supplyDemandaNew supplybc
29 Shift in Supply As we saw… The shift in the supply curve created a surplus.The price level didn’t change so now suppliers are offering more but demand hasn’t caught up!
30 Finding a New Equilibrium Excess supply or a surplus will cause producers to lower prices to eliminate the surplusDid the price drop change the demand curve?
31 New Equilibrium Graph A: A Change in Supply $800 $600 $400 $200 Price PriceOutput (in millions)Graph A: A Change in Supply12345Original supplyDemandaNew supplybc
32 Change in EquilibriumCurve will keep shifting while new technology is introduced to lower production costsEquilibrium changes constantlyChanges in the marketConsumer wants and needsProduction costs
33 Fall in SupplySupply curve can shift to the left with a drop in supplyA strike that results in higher wagesA tax by the government
34 Shifts in Demand New fads for Christmas New version of a product iPhone 5
35 Shifts in DemandGraph B: A Change in DemandOutput (in thousands)$60$50$40$30$20$10900800700600500400300200100PriceNew demandcbSupplyOriginal demandaGraph B shows how the market finds a new equilibrium when there is an increase in demand.
36 Problem of Excess Demand Shifting the demand curve to the right creates shortages
37 Shifts in Demand Graph B: A Change in Demand New demand c b Supply Original demanda$60$50$40$30$20$10Price100200300400500600700800900Output (in thousands)
38 Return to EquilibriumPrices will rise by produces as a result of this change in demandFall in demand has the opposite effect
40 Section 3 – The Role of Prices Prices in the Free MarketThe Advantages of PricesPrice as an IncentivePrice as SignalsFlexibilityPrice System is “Free”A Wide Choices of GoodsRationing ShortagesThe Black MarketEfficient Resource AllocationPrices and the Profit IncentiveThe Wealth of NationsMarket Problems
41 Prices in Free MarketPrices serve a major role in the free market economyHelps move the FOP
42 Advantages of Price Very Universal Price acts as an incentive Act as a standard measure of valueBarter system as alternativePrice acts as an incentiveThink of the Law of Demand and Law of Supply
43 Advantages of Prices Prices as Signals – Producers Higher prices signal to producers to make moreAlso signals new suppliers to enter marketLower prices signal too much is producedSignals suppliers to leave the market
44 Advantages of Prices Prices as Signals – Consumers Low prices signal to buy moreLow prices = low opportunity costHigh price to stop and think about a purchase
45 Advantages of Prices Flexibility Prices can easily be increased to solve shortages (excess demand)Prices can easily be decreased to solve surpluses (excess supply)
46 Advantages of Prices Supply Shock: a sudden shortage of a good Creates excess demandGasoline for exampleRationingAllocating scare goods and services using criteria other than priceHow easy is it to increase supply?
47 Supply Shock and Rationing Price$2.50$5.15246Gallons
48 Price Shock and Rationing Raising prices quickest way to solve shortagePeople with higher demand will still consumeCreating new equilibrium
49 Advantages of Price Price System is “Free” No cost to administer priceUnlike central planningSoviet Union employed thousands of people to organize the economyA farmer can decide what to plan based on what he thinks will be most profitablePrices help goods flow through the economy
50 Wide Choice of GoodsMarket Based Economy offers diverse goods and servicesPrices allow a “target” consumer baseBentleyFewer choices in Centrally PlannedReduce costs to meet quotas
51 Rationing and Shortages Despite being inexpensive, products were often hard to purchase in Soviet UnionRationing creates shortages
52 Rationing in the US During WWII Rationing existed GOVT Intent was to ensure everyone had a level standard of living during wartimeYou needed ration points and money to purchase productsGuns or ButterResources were allocated to gunsLeaving few for butter
53 The Black MarketBlack Market: A market in which goods are sold illegallyAllows consumers to buy rationed products buy paying more money
54 Efficient Resource Allocation Free market ensures resources are allocated efficientlyFOP used for most valuable purposeResources adjust to change in demands of consumersResources go to the consumer who values a good or service the most
55 Price and Profit Incentive What happens with a hot summer and the demand for air conditioners and fans?How would producers respond to this demand?
56 Price and Profit Incentive $100.00$250.0050010001500Air Conditioners
57 Wealth of Nations Adam Smith – 1776 Not because of charity that a baker or butcher provide people foodA profit is made by providing foodBusiness prospers by finding out what people wantOther systems haven’t worked…
58 Market Problems Imperfect Competition Spillover Costs (externalities) Not enough suppliers reduces competitionWhy lower price to have MR = MCSpillover Costs (externalities)Costs of production that affect people who have no control over how much of a good is producedPollutionImperfect InformationConsumers who lack knowledge of alternatives