Presentation on theme: "Equilibrium Price When the Laws of Supply and Demand Collide."— Presentation transcript:
Equilibrium Price When the Laws of Supply and Demand Collide
Diminishing Marginal Utility As a person increases consumption of a product - while keeping consumption of other products constant - there is a decline in the marginal utility that person derives from consuming each additional unit of that product.
Equilibrium Def. The point at which quantity demanded and quantity supplied come together.
Disequilibrium If the market price or quantity supplied is anywhere but a equilibrium price, the market is in a state called disequilibrium. Interactions between buyers and sellers will always push the market back towards equilibrium…. Unless the government interferes
Government Interference In some cases, the government steps in to control prices. Exs: Price ceilings and price floors.
Price Ceiling Def: A maximum price that can be legally charged for a good Ex: Rent Control: A situation where the government sets a maximum amount that can be charged for rent in an area. Usually in large cities- NYC or LA
Price Floor Def: A minimum price, set by the government, that must be paid for a good or service. Ex: Minimum Wage- sets a minimum price that an employer can pay a worker for an hour of labor Ex: Luxury or Sin Taxes- items like alcohol, cigarettes and gas have extra taxes
Problems with Price Floor and Ceilings Both prevent markets from reaching equilibrium. They prevent suppliers from producing as much as price dictates or prevents consumers from buying as much as they wish. Ex- Rent control; prevents landlords from getting full value. Ex: Cigarette taxes-prevent people from buying them=reduce the # of smokers
Equilibrium The point where supply and demand meet can change for 3 reasons:
1. Change in Supply Excess supply leads to a surplus (when supply is greater than demand). This leads to a decrease in price and in increase in demand. - Ex: After Christmas sales A decrease in supply leads to an increase in price. This leads to a decrease in demand.
Do Now- Review! Answer the following questions: 1) What is the Law of Demand 2) What is the Law of Supply 3) What is Profit? 4) What is Elasticity of Demand 5) What is Elasticity of Supply
2. Change in Demand If there is a shortage, when demand is greater than supply, price rises, which increases supply and decreases demand Ex: Tickle Me Elmo When demand falls, suppliers cut prices and find a new equilibrium
3. Change in Price As prices change, supply and demand will both change.
So why are prices important? Prices are vital in a free market economy They help move land, labor and capital into the hands of producers and finished goods to buyers. Price is a language both consumers and producers can use to determine value.
Advantages of Price 1. Price as an Incentive Price shows to buyers and sellers whether a good or service is scarce or easily available. Encourage or Discourage production. 2. Price as Signals (Traffic Light) - A high price (green light) tells produce to make more. Low Price (red) tells producers to make less
Advantages cont. 3. Flexibility of Prices – Prices are generally more flexible than production levels, can be easily increased or decreased 4. Price System is Free A distribution system based on price costs nothing to administer, unlike in command economies
How does scarcity of an item affect its price? If there is a scarcity on an item, then the price will be high. Ex: Gasoline
How does a boycott affect the price If an item is being boycotted, then the price often will go down. Ex: If everyone stopped buying gas, the price would drop
How does the war in Iraq affect the price of certain items? Price of many items have increased (ex: gas and security)