Price: Supply and Demand Together 9B Social – Economics

Moving to Market Equilibrium Supply (sellers) and demand (buyers) work together to determine price. –Circular flow of economic activity A market is said to be in equilibrium when the quantity demanded of a good equals the quantity supplied.

Moving to Market Equilibrium Example Only at a price of $4 is the quantity demanded equal to the quantity supplied. When: –Qs > Qd = Surplus –Qd > Qs = Shortage –Qd = Qs = Equilibrium

Finding Market Equilibrium Surplus: –The condition in which the quantity supplied of a good is greater than the quantity demanded. –Surpluses occur only at prices above equilibrium –Prices fall when a surplus occurs, because suppliers hope to sell their inventory, or the excess stock of goods that they have on hand.

Finding Market Equilibrium Surplus: –Example: Remember the starburst activity. If you were a business your left over resources (bolts, eyes, shells) was your surplus –Example: There are 40,000 Ipods. At $400 per Ipod, buyers only purchase 30,000. This leaves a surplus of 10,000 Ipods.

Finding Market Equilibrium Shortage: –The condition in which the quantity demanded of a good is greater than the quantity supplied. –Shortages only occur at prices below equilibrium price. –Prices rise when there is a shortage. Buyers will offer to pay a higher price to get sellers to sell to them rather than to other buyers.

Finding Market Equilibrium Shortage: –Example: Remember the starburst activity. If you were a consumer you may have overpaid for a starburst due to a scarcity. –Example: There are 40,000 Ipods. The price of the Ipods is $200. Buyers want to purchase 60,000. There is a shortage of 20,000

Market Equilibrium Graph

Finding Market Equilibrium Equilibrium: –In a market the point at which the quantity of a good that buyers are willing and able to buy is equal to the quantity that sellers are willing and able to produce and offer for sale. –Quantity demanded = quantity supplied –Ex: There are 40,000 Ipods. At $320, buyers purchase 40,000 Ipods.

Finding Market Equilibrium Equilibrium Quantity: –The quantity of a good bought and sold in a market that is in equilibrium. Equilibrium Price: –The price at which a good is bought and sold in a market that is in equilibrium.

Relationship of Quantity Demanded to Quantity Supplied Q s >Q d Surplus Q d >Q s Shortage Q d =Q s Equilibrium

Why Does Price Fall When a Surplus Occurs? Too much inventory! –When a surplus occurs, the suppliers inventories grow beyond normal amounts. Storing extra goods can be costly. –Surplus = Suppliers need to reduce the surplus by: –cutting prices or –cutting production output

Why Does Price Rise When There is a Shortage? Scarcity! –If a situation occurs where there are more buyers then sellers, some buyers will offer more money to sellers to make sure they get the good over another buyer. –This creates competition for a good –Shortage = suppliers: Raise prices and output until equilibrium is achiveved

What Causes Equilibrium Price to Change? –Change in Supply –Change in Demand –Change in Supply and Demand DemandSupplyEquilibrium Price Equilibrium Quantity ?+ --?- +-+? -+-?

What Causes Equilibrium Price to Change? Keeping market equilibrium is important because it keeps buyer and sellers happy. What would like be like without market equilibrium if you were a buyer? Seller?

What Causes Equilibrium Price to Change? Why is the price of a new video game systems (PS3) or Elmo dolls cost so much around Christmas time and then price falls after a few months?

Price Controls Price Is a Signal –Price serves as a signal that directs the allocation of resources toward producing the product with the highest demand. What Are Price Controls? –Sometimes the government prevents markets from reaching an equilibrium price. It may do so by setting a price ceiling or a price floor.

Price Controls Price Ceiling: –Price ceiling creates a shortage and reduces the quantity of a good bought and sold. –Usually imposed by the government to keep prices more affordable to buyers

Price Controls Price Floor: –Price floor creates a surplus and reduces the quantity of the good bought and sold. –Usually imposed by the government to help producers make more money

Price Controls Price Controls and the Amount of Exchange –Price ceilings and price floors have the unintended result of reducing the amount of trade in the economy.