1. Background
Anyone who has haggled over price of a used car, an antique, or anything at a garage sale knows the opposing interests of buyers and sellers.
Buyers always want to pay lowest possible price, while sellers hope to sell at highest possible price.
With buyers & sellers at odds, how can a market system satisfy both groups?
In a free market system, supply & demand work together.
Result is a price that both sides can live with.

2. Supply and Demand
Both supply & demand influence price of a good and quantity produced
We’ll generally be looking for the equilibrium - quantity demanded equals quantity supplied
(at market clearing price)

3. Disequilibrium:
Excess Supply
Quantity supplied is more than quantity demanded
Suppliers lower prices until can sell inventory
Excess Demand
Quantity demanded is more than quantity supplied
Suppliers raise prices until fewer people demand the good
Interactions between buyers & sellers pushes market back towards equilibrium.

4. Government Intervention:
Markets usually naturally move towards equilibrium point
BUT:
In some cases govt. steps in to control prices.
This appears as :
1.Price ceilings
price ceilings
2.Price floors

5. Price Ceilings: maximum legal price
Price is artificially held below the equilibrium price & is not allowed to rise (can’t charge more)
Why? Some G&S are deemed essential & could become too expensive
Rent control is most common example

6. Rent Control: government sets a maximum amount that can be charged for rent in an area.

10. The Cost of Price Ceilings=
When price cannot rise to equilibrium level, creates a SHORTAGE
How to allocate resources
Luck?
Bribery?
Black Market?
Creates rationing problem – who gets G/S, who doesn’t???
Leads to sost-cutting (slumlords)
$1 Pizza too cheap for all that work
Cheap rent not enough to make landlords keep up their property

11. How to resolve shortage (excess demand) problem?
First come- first served
Sellers choice
Lottery
Government Choice

12. Shortage Examples:
Gasoline in California –

13. Price Floors: minimum legal price that can be charged for good/service
Exists when price is artificially held above equilibrium price and is not allowed to fall (can’t charge less)
Govt. trying to guarantee a price to protect producers/suppliers

14. Price Floors Create Surpluses!
Happens when govt. wants sellers to get a mimimum reward
One well-known price floor is minimum wage, which sets a minimum price that an employer can pay a worker for an hour of labor.
Did this b/c producers use more resources to make goods than consumers are willing to pay $ for. SO GOVT. PAYS AND STORES THE AGRICULTURAL PRODUCTS. Found that it was conflicting with free enterprise & stopped, now gives emergency aid to farmers.

15. Examples: President Obama Minimum Wage Minimum Wage
Does Minimum Wage Hurt the Worker?
Businessman on Minimum Wage
Creates a surplus of …

17. MARY POPPINS QUITS

18. Solutions to a Surplus:
Absorb the Surplus
Change Product Name
Offer Incentives-
BOGO
Free w/purchase

19. JOHN OLIVER

20. Supply and Demand Review
What were factors that shifted demand?
Consumer Expectations
Population
Tastes and Preferences
Income
Fads
What were factors that shifted supply?
Government
Number of suppliers
Cost of inputs
Natural disasters
Technology
Outsourcing
Producer Expectations
How can we use supply and demand curves to analyze changes in market equilibrium?

21. Understanding a Shift:
Markets tend toward equilibrium, change in supply leads market to new equilibrium price & quantity sold.
If surplus occurs, producers reduce prices to sell products.
Creates new market equilibrium AND eliminates surplus.
If shortage occurs producers will raise prices and demand will decrease.
SURPLUS= PRODUCERS REDUCE PRICES & SUPPLY LESS=ENCOURAGES MORE DEMAND&THEREFORE SURPLUS WILL BE ELIMINATED

22. A shift in supply will change the equilibrium price and quantity
Shift Right
Shift Left
A SHIFT IN SUPPLY WILL CHANGE THE EQUILIBRIUM PRICE AND QUANTITY!
INCREASE IN SUPPLY LEADS TO LOWER PRICE AND MORE QUANTITY SOLD=LAPTOPS, TECH =COST OF PRODUCTION DOWN, CARS TOO!

23. A Shift in Demand: Excess Demand=PRICE INCREASES
A Fall in Demand=PRICE DECREASES
When demand falls, suppliers respond by cutting prices, & new market equilibrium is found.
Search Costs- financial & opportunity costs consumers pay when searching for a good/service.
Nintendo Wii’s, Elmo dolls

24. Shift Right
Hurricane coming, demand for portable generators shifts to right, PRICE up too.
Shift Left S P Do
PORTABLE GENARATORS, HURRICANE COMING, DEMAND UP, SHIFTS TO THE RIGHT, PRICE UP TOO. Don’t have enough for every one in short run so only those who can pay high price get one. D1 Q