Prices

Price Price is the monetary value of a product as established by supply and demand.

Prices Prices help buyers and sellers allocate resources more effectively and efficiently. Without prices the market system would not work.

Producers and consumers communicate through pricing.

Without Prices Example: Rationing is a system where an agency such as government decides everyone’s fair share. Is this system fair? Is it cost effective? Does it diminish individual incentive?

Equilibrium

Equilibrium Equilibrium quantity - the quantity that is both demanded and supplied at the equilibrium price. Equilibrium price - the price at which the quantity demanded equals the quantity supplied.

Pe Qe

The Price System at Work Market Equilibrium In a competitive market, the adjustment process moves toward market equilibrium.

Graph the following data Price Quantity Demanded Quantity Supplied $4.00 10 300 $3.75 15 275 $3.50 20 250 $3.25 25 225 $3.00 30 200 $2.75 35 175 $2.50 50 150 $2.25 75 120 $2.00 100 $1.75 125 $1.50 $1.25 290 $1.00 400

$4 $3 $2 $1 25 50 75 100 125 150 175 200 225 275 300 325 350 375 400

Graph What is the Equilibrium price? What is the Equilibrium quantity? What would happen to the equilibrium price if the Supply shifts to the right? What would happen to the equilibrium price if the Demand shifts left?

Discuss with a partner What do we call the point where supply and demand cross? What do we label the equilibrium price on the graph? What do we label the equilibrium quantity on the graph?

When demand and supply are not equal we call it disequilibrium.

Shortage vs. Surplus Surplus is the condition in which the quantity supplied is greater than the quantity demanded at a certain price. Shortage is the condition in which the quantity demanded is greater than the quantity supplied at a certain price.

Surplus Shortage

Equilibrium Price The equilibrium price is the price that “clears the market” by leaving neither a surplus or shortage at the end of the trading period.

What is Equilibrium price? Price for I-pod Q Demanded Q Supplied 1 200 50 1.25 175 75 1.50 150 100 1.75 125 2.00 2.25 2.50 Shortage Surplus

Create a Graph to find the Equilibrium. Where is Equilibrium? P for Chicken Bowl Q Demanded Q Supplied 1 300 1.25 275 100 1.50 250 150 1.75 225 200 2.00 2.25 2.50 50 350 Shortage Surplus Create a Graph to find the Equilibrium.

Simulation: The Pearl Exchange

Buyers and Sellers 4 trading sessions. You sale only one pearl per round. Tell me what the pearl sold for. If you don’t sell any you get negative whatever your goal was. Price is what it sold for Minimum/Maximum is the number I showed you before the round

Round One

Round Two

Round Three

IF price stayed the same we would have a shortage

Round Four

IF price stayed the same we would have a surplus

Government Involvement

Government impact… Governmental involvement of the allocation of goods and services distorts market outcomes. When government sets prices at “socially desirable” levels the price system cannot transmit accurate information to buyers and sellers.

Government Intervention Government intervention is the condition where government sets prices. It can set a price ceiling(maximum price). It can set a price floor(minimum price). This intervention occurs when it feels the market system is not working.

Government Intervention A price ceiling is the maximum legal price that can be charged for a product.

Price Ceilings Provide a gain for buyers and a loss for sellers. Examples: Rent controlled apartments

Impact of price ceilings A black market can occur. an illegal market in which the market price is higher than a legally imposed price ceiling. Black markets develop where there is excess demand.

Government Intervention A price floor is the lowest legal price that cab be paid for a good or service. Minimum wage is an example of a price floor.

“When you raise the price of employment, guess what happens “When you raise the price of employment, guess what happens? You get less of it. - John Boehner, Speaker of the House of Representatives, February 2014 “The Sooner we improve workers’ wages, the sooner we’ll see the economic recovery take off and our prolonged unemployment crisis fade. - Christine Owens, Executive Director of National Employment Law Project, May 2012