2. Chapter 6 Prices: Combining Supply and Demand

3. Combining Supply and Demand Buyers and sellers have to meet at a certain point Buyers and sellers have to meet at a certain point This point is called equilibrium This point is called equilibrium Equilibrium – price at which Qs = Qd Equilibrium – price at which Qs = Qd –“Market Clearing Price” At this point, the market for a good is stable At this point, the market for a good is stable

4. How do we find equilibrium? There will be a nice point on the “X” on the graph! There will be a nice point on the “X” on the graph!

5. How do we find equilibrium?

6. Disequilibrium Disequilibrium – when quantity supplied does not equal quantity demanded Disequilibrium – when quantity supplied does not equal quantity demanded –Excess Demand (Shortage) – quantity demanded is more than quantity supplied (prices beneath equilibrium price)

7. Excess Demand If you were selling delicious Sweet Onion Chicken Teriyaki sandwiches for $2.00 a piece… If you were selling delicious Sweet Onion Chicken Teriyaki sandwiches for $2.00 a piece…

8. Excess Demand You may have 500 people lined up outside of your Subway to buy them! You may have 500 people lined up outside of your Subway to buy them!

9. Excess Demand However, you can only make 250 during the day… What do you do? However, you can only make 250 during the day… What do you do?

10. Excess Demand Remember… it’s okay to raise your prices to a point that you lose 250 customers, because that’s all you can feed anyway! Remember… it’s okay to raise your prices to a point that you lose 250 customers, because that’s all you can feed anyway!

11. Excess Demand The point at which you are only making enough sandwiches to feed the customers who want them is equilibrium The point at which you are only making enough sandwiches to feed the customers who want them is equilibrium

12. Excess Supply Excess Supply (Surplus) – Quantity supplied is more than quantity demanded (prices above the equilibrium price) Excess Supply (Surplus) – Quantity supplied is more than quantity demanded (prices above the equilibrium price)

14. Excess Supply This would be if you were producing 250 sandwiches a day, but only had 150 people coming in. This would be if you were producing 250 sandwiches a day, but only had 150 people coming in. You would reduce your prices to meet the demand (otherwise, it’s a huge waste of resources!) You would reduce your prices to meet the demand (otherwise, it’s a huge waste of resources!)

15. Any Typical High School Boy Questions? This is stupid. Why do we have to learn this?

16. Think Back to Adam Smith Adam Smith said that the “invisible hand” let men be free and still do what’s best for all men Adam Smith said that the “invisible hand” let men be free and still do what’s best for all men Market equilibrium is the “invisible hand!” Market equilibrium is the “invisible hand!” Companies only produce what society needs because that is best for their profits! Companies only produce what society needs because that is best for their profits!

17. With Ashlee Simpson

19. Government Intervention In the American mixed economy, government still takes actions to protect consumers from businesses In the American mixed economy, government still takes actions to protect consumers from businesses

20. Examples of Interventions Price Ceilings – a maximum that can be legally charged for a good Price Ceilings – a maximum that can be legally charged for a good –Rent Control – a type of price ceiling where the government sets a maximum legal rate for rent

21. Problems with Price Ceilings When you set the price lower than the market allows: When you set the price lower than the market allows: –Quantity supplied goes down, as businesses don’t want to lose money –Quantity demanded goes up, as consumers want to take advantage of low prices –This all creates…

23. Examples of Interventions Price Floors – a minimum price set by the government that must be paid for a good or service Price Floors – a minimum price set by the government that must be paid for a good or service –Minimum Wage – a type of price floor where a business must pay a worker at least a certain amount for an hour of labor

24. Problems with Price Floors If the government sets a price floor above market equilibrium, people stop consuming that product (or service) If the government sets a price floor above market equilibrium, people stop consuming that product (or service) So if the government sets minimum wage too high, for example, you get So if the government sets minimum wage too high, for example, you get

26. And Now for Something Completely Different

27. 2 Minute Sketches I am putting you into groups of 6 I am putting you into groups of 6 2 of you will be the “consumers,” 2 of you will be the “producers,” and 2 of you will be the “government” 2 of you will be the “consumers,” 2 of you will be the “producers,” and 2 of you will be the “government” You will write a 2 minute script illustrating the concept I assign you You will write a 2 minute script illustrating the concept I assign you Everyone must have a line! Everyone must have a line!

28. The Role of Prices

29. The Price System The U.S. and other free markets operate under the “price system” The U.S. and other free markets operate under the “price system” The price system uses a monetary figure to display the value of a good, letting consumers choose which goods to spend their money on The price system uses a monetary figure to display the value of a good, letting consumers choose which goods to spend their money on

30. Advantages Price is an incentive – it tells consumers and producers how to adjust their patterns Price is an incentive – it tells consumers and producers how to adjust their patterns Price is a signal – it tells people whether the market for a good is profitable or not Price is a signal – it tells people whether the market for a good is profitable or not

31. Advantages The Price System is Flexible – prices change with supply and demand The Price System is Flexible – prices change with supply and demand The Price System is Free – the price system does not require large government agencies to oversee the distribution of goods The Price System is Free – the price system does not require large government agencies to oversee the distribution of goods

32. Problems with Other Systems Rationing – the government sets limits on how much of a product you are allowed to consume Rationing – the government sets limits on how much of a product you are allowed to consume –Rationing causes shortages since the government often does not set reasonable limits

33. Problems with Other Systems The Black Market – the market where goods are sold illegally The Black Market – the market where goods are sold illegally –Black Markets encourage higher prices, and also defeat the purpose of a command economy

34. Typical High School Boy Questions? This is stupid. I hate economics. It doesn’t matter.

35. Here’s Why it Matters The Price System allows resources to be allocated (given out) efficiently The Price System allows resources to be allocated (given out) efficiently All resources are placed where they are most valuable to consumers All resources are placed where they are most valuable to consumers All without the intrusion of the government in your life! All without the intrusion of the government in your life!

36. Adam Smith, Man of Astounding Genius and Economic Brilliance for His Time, and for Ours as well. Answer this question: why do butchers and bakers provide people with food?

37. Adam Smith, Man of Astounding Genius and Economic Brilliance for His Time, and for Ours as well. Because they will make a profit!

38. Adam Smith, Man of Astounding Genius and Economic Brilliance for His Time, and for Ours as well. This is the theory in Smith’s book, The Wealth of Nations

39. Possible Disadvantages Imperfect Competition – if only a few firms sell a product, there is not enough competition to keep prices low Imperfect Competition – if only a few firms sell a product, there is not enough competition to keep prices low Spillover Costs – costs that affect people with no control over the production of a good (such as pollution) Spillover Costs – costs that affect people with no control over the production of a good (such as pollution)