Prices…How are they determined? By the Intersection of the Supply and Demand Curve! Equilibrium Price and Equilibrium Supply

Prices are Determined by Equilibrium Equilibrium- the point of balance between price and quantity supplied Disequilibrium is when the supply is not equal to the demand –Excess demand- more demand than the market is supplying –Excess Supply- more supply than people demand Equilibrium Quantity Equilibrium Price

Price Ceilings and Floors Price Ceiling- Maximum price that can be charged for a good –Rent Control- creating a maximum price that can be charged for rent in a given area Price Floor- Minimum price that can be charged for a good or service –Minimum wage- the minimum amount that a person can be paid for a service

Changes in Equilibrium: Surplus Certain factors shift the supply curve: –Technology, gov’t taxes or subsidies, changes in prices of inputs like raw materials and labor Surplus- when the quantity supplied is greater than demand over a period of time, excess products remain unsold! –This happens as the demand for older goods decreases over time: like VHS players Surplus: when supply exceeds demand! What happens when the supply shifts to the right? New New Quantity Supplied

Shifting the Supply Curve As Supply shifts, so to does the equilibrium price of goods. In this example the supply of goods has shrunk, but the demand has stayed the same –This results in a higher equilibrium price and a lower equilibrium supply

Excess Demand Shortage- where quantity demanded is greater than the quantity supplied –If the demand curve shifts to the right, gets greater, and the price remains the same, there will not be enough goods to supply all interested consumers! Search Costs- the financial and opportunity costs that people pay by taking time to search and find goods and services New Quantity Demanded

Elasticity of Demand

Elasticity Elasticity= the degree to which consumers respond to price changes.

Elasticity Elastic Demand= describes demand that is very sensitive to a change in price Inelastic Demand= describes demand that is not very sensitive to a change in price

What determines Elasticity? Number of Substitutes –The fewer the substitutes for a good the less responsive buyers are to price increase  Inelastic

What determines Elasticity? Number of Substitutes –The more substitutes there are for a good, the more responsive buyers are to price increases  Elastic

What determines Elasticity? Luxuries VS Necessities –If the P of a necessity increases, people cannot cut back on the good  Inelastic

What determines Elasticity? Luxuries VS Necessities –If the P of a luxury good increases, people are more able to cut back on the good  Elastic

What determines Elasticity? Percentage of Income Spent on the Good –Buyers are less responsive to P changes for goods on which they spend a smaller % of their income  Inelastic

What determines Elasticity? Percentage of Income Spent on the Good –Buyers are more responsive to P changes for goods on which they spend a larger % of their income  Elastic

What determines Elasticity? Time –The less time you have to respond to a price change, your demand for that good doesn’t change  Inelastic

What determines Elasticity? Time –With more time you can change your consumption by finding substitutes and changing your lifestyle  Elastic

What determines Elasticity? Time- plays a key role in the elasticity of goods –In the short run, a firm cannot easily change its output level  inelastic supply –In the long run, firms are more flexible  elastic supply Which supply is elastic? Why? Tree farmers cannot change their crops annually to match prices since they have invested both time and labor into creating their produce.