Presentation on theme: "INTERACTION OF DEMAND AND SUPPLY"— Presentation transcript:
1 INTERACTION OF DEMAND AND SUPPLY SEEKING EQUILIBRIUMDEMANDSUPPLYINTERACTION OF DEMAND AND SUPPLY
2 What is market equilibrium? What is equilibrium price? OCCURS WHEN QUANTITY DEMANDED AT A PARTICULAR PRICE = QUANTITY SUPPLIED AT THAT PRICEPLACE WHERE THE MARKET IS IN BALANCE; PRICE AT WHICH QUANTITY DEMANDED = QUANTITY SUPPLIED
3 BECAUSE THE QUANTITY DEMANDED = THE QUANTITY SUPPLIED PRICE PER COOKIE ($)QUANTITY DEMANDEDQUANTITY SUPPLIED2.0010501.7520401.50301.251.00According to the Market Demand and Supply schedule ABOVE, what is the equilibrium price?How do you know?$1.50BECAUSE THE QUANTITY DEMANDED = THE QUANTITY SUPPLIED
4 Now draw the Market Demand and Supply Curve. Label the equilibrium price.$2.25PRICE PER COOKIE$2.00$1.75$1.50EP$1.25$1.00102030405060NUMBER OF COOKIESEQUILIBRIUM PRICE (EP) = $1.50
5 EQUILIBRIUM PRICE IN REAL LIFE EQUILIBRIUM PRICE IN REAL LIFE
6 PRICES AS SIGNALS AND INCENTIVES: What is competitive pricing?WHEN SELLERS SELL GOODS AND SERVICES AT PRICES THAT BEST BALANCE THE TWIN DESIRES OF MAKING THE HIGHEST PROFIT AND LURING CUSTOMERS AWAY FROM RIVAL PRODUCERS
7 NEUTRAL- MARKET DRIVEN- EFFICIENT- FLEXIBLE- What are the characteristics of the Price System?NEUTRAL-Both the producer and the consumer make the choices that determine the equilibrium price.MARKET DRIVEN-Market forces, not govt. policy, determine prices. In effect, the system runs itself.EFFICIENT-Resources are allocated efficiently since prices adjust until the maximum number of goods and services are sold.FLEXIBLE-When market conditions change, so do prices.
8 How do prices motivate consumers? WHEN PRICES ARE LOW OR ADVERTISED AS BEING LOW, CONSUMERS KNOW IT’S TIME TO BUYHow do prices motivate producers?WHEN PRICES ARE HIGH, PRODUCERS ARE MOTIVATED TO INCREASE SUPPLY; WHEN THEY ARE LOW, THE DECREASE SUPPLY.
9 INTERVENTION IN THE PRICE SYSTEM: What is a price ceiling? AN ESTABLISH MAXIMUM PRICE SELLERS MAY CHARGE FOR A GOOD OR SERVICEWhy are price ceilings used?TO PREVENT THE PRICE OF A GOOD OR SERVICE FROM GETTING TOO HIGHEx. College football tickets
10 AN ESTABLISH MINIMUM PRICE BUYERS MUST PAY FOR A GOOD OR SERVICE What is a price floor?AN ESTABLISH MINIMUM PRICE BUYERS MUST PAY FOR A GOOD OR SERVICEWhy are price floors used?TO INCREASE INCOME TO CERTAIN PRODUCERS(Ex. Minimum wage)
11 GOVT. ALLOCATES GOODS & SERVICES USING FACTORS OTHER THAN PRICE What is a rationing?GOVT. ALLOCATES GOODS & SERVICES USING FACTORS OTHER THAN PRICEWhen & why has it been used in the US?DURING WWII FOR SCARCE GOODS SO THAT THE GOODS COULD BE DISTRIBUTED TO EVERYONE NOT JUST THE WEALTHY
12 What is black market?GOODS & SERVICES ARE ILLEGALLY BOUGHT & SOLD IN VIOLATION OF PRICE CONTROLS OR RATIONING