Determining Price

At the beginning of this unit, we examined demand:

Price per Gadget # Gadgets Demanded $10600 $9720 $8850 $7990 $61140 $51300 $41470 $31650 $21840 $12040

Then we examined supply:

Price per Gadget # Gadgets Supplied $ $91500 $81450 $71400 $61350 $51300 $41250 $31200 $21150 $11100

In order to determine price, supply and demand must be examined together:

Price per Gadget # Gadgets Demanded # Gadgets Supplied $ $ $ $ $ $51300 $ $ $ $

Equilibrium SupplyDemand for Gadgets

Three Possible Results Surplus – Because the price is too high, quantity supplied exceeds quantity demanded at a given price. Shortage – Because the price is too low quantity supplied is less than quantity demanded at a given price. Equilibrium – Quantity supplied equals quantity demanded at a given price. (See $5 in the previous example.) – This is the desired result. – Equilibrium price is also known as market price.

Surplus price Quantity Demanded Quantity Supplied Surplus DS

Shortage price Quantity Supplied Quantity Demanded Shortage DS

Adjustments While the equilibrium is where the price should be, it does not always work that way. When there is a surplus, suppliers need to attract more buyers. – They do this by lowering the price during the next trading period. – At the same time, they decrease the quantity supplied. – This results in a move toward equilibrium.

Adjustments, cont. When there is a shortage, suppliers try to meet the needs of more buyers. – They do this by increasing the quantity supplied during the next trading period. – At the same time, they increase the price. – This results in a move toward equilibrium.

Equilibrium Competition is necessary for equilibrium to be reached. – Without competition, a supplier may raise the price without worrying about a surplus, since buyers have nowhere else to go. – In a command economy, shortages may result because prices are set too low – there is no way for equilibrium to be reached.

Price-Related Policies Sometimes consumers or suppliers are not actually happy with the market price, so they ask the government to step in. There are two main types of price-related policies: – Price ceilings – Price floors Both of these involve trade-offs which are not always considered.

Price Ceilings Purpose: to keep prices low so that a product is affordable for a greater number of people. – This is essentially what many people would like to see happen with health care. A price ceiling is set below the market price (which is considered too high), or it will have no effect. Result (unintended): shortage – It is affordable for more people, but fewer people actually get it. Example: rent control – People who had cheap apartments were happy, but others had difficulty finding housing.

Price Ceilings D S Market price (considered to be too high) Price ceiling Shortage

Price floors Purpose: to keep prices high so that suppliers can make more money. A price floor is set above the market price (which is considered too low), or it will have no effect. Result (unintended): surplus – Suppliers would receive a higher price, but would actually sell less. Example: minimum wage – If minimum wage were increased, fewer people would have those jobs, but they would be making more money.

Price Floors D S Market price (considered to be too low) Price floor Surplus