Presentation on theme: "Chapter 6 – Price Cutler – Economics. BELLRINGER What would happen if the government decided gas prices should be lowered by $2.50 per gallon?"— Presentation transcript:
Chapter 6 – Price Cutler – Economics
BELLRINGER What would happen if the government decided gas prices should be lowered by $2.50 per gallon?
Section 1 – Combining Supply and Demand Balancing the Market –Defining Equilibrium –Graphing Equilibrium Disequilibrium –Excess Demand –Excess Supply Government Intervention Price Ceilings –The Cost of Price Ceilings –Ending Rent Control Price Floors –Minimum Wage –Price Supports in Agriculture
Balancing the Market Market System –Consumers can buy productions they want –Sellers make enough profit to stay in business –Sellers respond to changing needs of consumers Turning competing interests into a positive outcome for both sides
Balancing the Market Buyers and sellers come together in the market –Combining Supply and Demand Review Demand Schedule –Price of goods compared to how much is produced Review Supply Schedule –Price of goods compared to how much is consumed
Demand and Supply Schedule Price of a slice of pizza Quantity demanded Quantity supplied Result Combined Supply and Demand Schedule $ $2.00 $2.50 $ $ $
Defining Equilibrium Equilibrium: The point at which quantity demanded and quantity supplied are equal Balance between price and quantity –Market is then stable The amount produced will equal the amount consumed
Graphing Equilibrium Price per slice Equilibrium Point Finding Equilibrium Price of a slice of pizza Quantity demanded Quantity supplied Result Combined Supply and Demand Schedule $ $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $.50 Slices of pizza per day Supply Demand $2.00 $2.50 $ Surplus from excess supply $ Equilibrium Equilibrium Price a Equilibrium Quantity $ Shortage from excess demand
Disequilibrium Disequilibrium: a point when quantity supplied does not equal quantity demanded Creates excess demand or excess supply
Excess Supply At $2.50 per slice –QD = 100 Slices –QS = 300 Slices Creates a Surplus
Analyze the Data Price of a slice of pizza Quantity demanded Quantity supplied Result Combined Supply and Demand Schedule $ $2.00 $2.50 $ $ $ Shortage Occurs because QD > QS Surplus Occurs because QD < QS Equilibrium QD = QS
BELLRINGER Can you think of any products you buy that have recently changed in price?
Government Intervention Markets tend to reach equilibrium Price Ceiling: a maximum price that can be legally charged for a good or service Price Floor: a minimum price for a good or service
Price Ceilings Rent Control –Housing is essential but wages might not keep up with the supply and demand of houses –Reduces the quantity and quality of housing
Cost of Price Ceilings When price cannot rise to equilibrium, market determines who receives good or service By setting price below equilibrium, profits are reduced –Cost cutting occurs –Poor quality homes/apartments
Ending Rent Control Landlords gain an incentive to maintain buildings What affect does it have on the number of apartments? –Rent Graph
Price Floors Minimum price set by the government to be paid for a good or service Minimum Wage –Base level pay for work
Price Supports in Agriculture Price floors are used for many farm products Government would buy excess crops when price fell below floor
Section 2 – Changes in Market Equilibrium Changes in Price –Understanding a Shift in Supply –Finding a New Equilibrium –Changing Equilibrium A Fall in Supply Shifts in Demand –Problem of Excess Demand –Return to Equilibrium –A Fall in Demand
Changes in Price Excess supply will cause firms to cut prices Falling prices cause QD to rise QS will fall until they meet again These are changes ALONG the supply or demand curve… not shifts
Changes in Price What shifts the supply curve? –Technology Change –New taxes/Subsidies by GOVT –Input costs change Because they want to be at equilibrium, curve shifts will create a new equilibrium price and quantity
Understanding a Shift in Supply Falling prices affect on supply –CD players were expensive initially –Now less than $100 and compete with MP3 or digital music Fall in production costs shifts supply curve to the right
Shifts in Supply $800 $600 $400 $200 0 Price Output (in millions) Graph A: A Change in Supply Original supply Demand a New supply b c
Shift in Supply As we saw… The shift in the supply curve created a surplus. –The price level didnt change so now suppliers are offering more but demand hasnt caught up!
Finding a New Equilibrium Excess supply or a surplus will cause producers to lower prices to eliminate the surplus Did the price drop change the demand curve?
New Equilibrium $800 $600 $400 $200 0 Price Output (in millions) Graph A: A Change in Supply Original supply Demand a New supply b c
Change in Equilibrium Curve will keep shifting while new technology is introduced to lower production costs Equilibrium changes constantly –Changes in the market –Consumer wants and needs –Production costs
Fall in Supply Supply curve can shift to the left with a drop in supply A strike that results in higher wages A tax by the government
Shifts in Demand New fads for Christmas New version of a product –iPhone 5
Shifts in Demand Graph B shows how the market finds a new equilibrium when there is an increase in demand. Graph B: A Change in Demand Output (in thousands) $60 $50 $40 $30 $20 $ Price Supply Original demand a New demand c b
Problem of Excess Demand Shifting the demand curve to the right creates shortages
Shifts in Demand Graph B: A Change in Demand Output (in thousands) $60 $50 $40 $30 $20 $ Price Supply Original demand a New demand c b
Return to Equilibrium Prices will rise by produces as a result of this change in demand Fall in demand has the opposite effect
BELLRINGER What is the Black Market?
Section 3 – The Role of Prices Prices in the Free Market The Advantages of Prices –Price as an Incentive –Price as Signals –Flexibility –Price System is Free A Wide Choices of Goods –Rationing Shortages –The Black Market Efficient Resource Allocation Prices and the Profit Incentive –The Wealth of Nations –Market Problems
Prices in Free Market Prices serve a major role in the free market economy –Helps move the FOP
Advantages of Price Very Universal –Act as a standard measure of value –Barter system as alternative Price acts as an incentive –Think of the Law of Demand and Law of Supply
Advantages of Prices Prices as Signals – Producers –Higher prices signal to producers to make more –Also signals new suppliers to enter market –Lower prices signal too much is produced –Signals suppliers to leave the market
Advantages of Prices Prices as Signals – Consumers –Low prices signal to buy more –Low prices = low opportunity cost –High price to stop and think about a purchase
Advantages of Prices Flexibility –Prices can easily be increased to solve shortages (excess demand) –Prices can easily be decreased to solve surpluses (excess supply)
Advantages of Prices Supply Shock: a sudden shortage of a good –Creates excess demand –Gasoline for example Rationing –Allocating scare goods and services using criteria other than price –How easy is it to increase supply?
Supply Shock and Rationing Price Gallons $2.50 $
Price Shock and Rationing Raising prices quickest way to solve shortage People with higher demand will still consume Creating new equilibrium
Advantages of Price Price System is Free –No cost to administer price –Unlike central planning –Soviet Union employed thousands of people to organize the economy A farmer can decide what to plan based on what he thinks will be most profitable Prices help goods flow through the economy
Wide Choice of Goods Market Based Economy offers diverse goods and services Prices allow a target consumer base –Bentley Fewer choices in Centrally Planned –Reduce costs to meet quotas
Rationing and Shortages Despite being inexpensive, products were often hard to purchase in Soviet Union Rationing creates shortages
Rationing in the US During WWII Rationing existed –GOVT Intent was to ensure everyone had a level standard of living during wartime –You needed ration points and money to purchase products –Guns or Butter Resources were allocated to guns Leaving few for butter
The Black Market Black Market: A market in which goods are sold illegally –Allows consumers to buy rationed products buy paying more money
Efficient Resource Allocation Free market ensures resources are allocated efficiently –FOP used for most valuable purpose –Resources adjust to change in demands of consumers –Resources go to the consumer who values a good or service the most
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?
Price and Profit Incentive Price Air Conditioners $ $250.00
Wealth of Nations Adam Smith – 1776 –Not because of charity that a baker or butcher provide people food –A profit is made by providing food Business prospers by finding out what people want –Other systems havent worked…
Market Problems Imperfect Competition –Not enough suppliers reduces competition –Why lower price to have MR = MC Spillover Costs (externalities) –Costs of production that affect people who have no control over how much of a good is produced –Pollution Imperfect Information –Consumers who lack knowledge of alternatives