1. CHEVALIER FALL 2015 Supply and Demand Together

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

3. 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

4. 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

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

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

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

8. Price ceilings and price floors graphs