2. Prices

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

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

6. Producers and consumers communicate through pricing.

7. 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?

8. Equilibrium

9. 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.

10. Pe Qe

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

12. 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

13. $4 $3 $2 $1

14. 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?

15. 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?

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

17. 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.

18. Surplus
Shortage

19. 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.

20. 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

21. 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.

22. Simulation: The Pearl Exchange

23. 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

24. Round One

25. Round Two

26. Round Three

27. IF price stayed the same we would have a shortage

28. Round Four

29. IF price stayed the same we would have a surplus

30. Government Involvement

31. 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.

32. 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.

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

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

35. 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.

36. 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.

37. “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