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SEEKING EQUILIBRIUM SUPPLY DEMAND INTERACTION.

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Presentation on theme: "SEEKING EQUILIBRIUM SUPPLY DEMAND INTERACTION."— Presentation transcript:

1 SEEKING EQUILIBRIUM SUPPLY DEMAND INTERACTION 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 PRICE PLACE WHERE THE MARKET IS IN BALANCE; PRICE AT WHICH QUANTITY DEMANDED = QUANTITY SUPPLIED

3 PRICE PER COOKIE ($) QUANTITY DEMANDED QUANTITY SUPPLIED According to the Market Demand and Supply schedule ABOVE, what is the equilibrium price? How do you know? $1.50 BECAUSE THE QUANTITY DEMANDED = THE QUANTITY SUPPLIED

4 Now draw the Market Demand and Supply Curve. Label the equilibrium price $1.00 $1.25 $1.50 $1.75 $2.00 $2.25 EQUILIBRIUM PRICE (EP) = $1.50 NUMBER OF COOKIES PRICE PER COOKIE EP

5 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 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 ITS TIME TO BUY How 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 SERVICE Why are price ceilings used? TO PREVENT THE PRICE OF A GOOD OR SERVICE FROM GETTING TOO HIGH Ex. College football tickets

10 What is a price floor? AN ESTABLISH MINIMUM PRICE BUYERS MUST PAY FOR A GOOD OR SERVICE Why are price floors used? TO INCREASE INCOME TO CERTAIN PRODUCERS (Ex. Minimum wage)

11 What is a rationing? GOVT. ALLOCATES GOODS & SERVICES USING FACTORS OTHER THAN PRICE When & 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


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