CHEVALIER FALL 2015 Supply and Demand Together. Warm-Up #9: Review Notes… Explain the pricing mechanism. When do surpluses occur and when do shortages.

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CHEVALIER FALL 2015 Supply and Demand Together

Warm-Up #9: Review Notes… Explain the pricing mechanism. When do surpluses occur and when do shortages occur.

I. Pricing Mechanism A. Price Communication  Communicate information; provides incentives to buyers and sellers  High prices are a signal for producers to produce________  High prices are a signal for consumers to buy __________  1. neutrality of prices  2. flexibility of prices  No cost of administration

B.Non price allocation  Rationing  Ration coupons  WWII  Decisions based upon everyone’s fair share  Command economies Problems of non price allocation 1. fairness 2. diminishing incentives High administrative costs

II. Supply and Demand A. Equilibrium (MCP)  graph B. Shift of curve establishes a new MCP  graph

III. Shortage Qd>Qs at a given price  Graph  P. 145  Price below equilibrium

IV- Surplus Qd<Qs at a given price  Graph  P.145  Price above equilibrium

Price ceilings and price floors graphs

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