Econ ch06
- 1. Chapter 6 Section Main Menu Combining Supply and Demand • How do supply and demand create balance in the marketplace? • What are differences between a market in equilibrium and a market in disequilibrium? • What are the effects of price ceilings and price floors?
- 2. Chapter 6 Section Main Menu Defining Equilibrium • Equilibrium – the point at which quantity demanded and quantity supplied are equal – Point of balance b/w price and quantity – At the equilibrium the market is stable • Buyers will purchase exactly as much of the product as firms are willing to sell • Disequilibrium – any price or quantity not at equilibrium; quantity supplied and quantity demanded not equal
- 3. Chapter 6 Section Main Menu Priceperslice Equilibrium Point Finding Equilibrium Price of a slice of pizza Quantity demanded Quantity supplied Result Combined Supply and Demand Schedule $ .50 300 100 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $.50 Slices of pizza per day 0 50 100 150 200 250 300 350 Supply Demand $2.00 $2.50 $3.00 150 100 50 250 300 350 Surplus from excess supply $1.50 200 200 Equilibrium Equilibrium Price a Equilibrium Quantity $1.00 250 150 Shortage from excess demand Balancing the Market
- 4. Chapter 6 Section Main Menu Excess Demand • Excess Demand – when quantity demanded is more than quantity supplied – Actual price below the equilibrium price, excess demand – Low price encourages buyers and discourages sellers – Graph • $1 a slice will have demand of 250 slices and supply of 150 slices • Excess is 100 slices
- 5. Chapter 6 Section Main Menu Priceperslice Equilibrium Point Finding Equilibrium Price of a slice of pizza Quantity demanded Quantity supplied Result Combined Supply and Demand Schedule $ .50 300 100 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $.50 Slices of pizza per day 0 50 100 150 200 250 300 350 Supply Demand $2.00 $2.50 $3.00 150 100 50 250 300 350 Surplus from excess supply $1.50 200 200 Equilibrium Equilibrium Price a Equilibrium Quantity $1.00 250 150 Shortage from excess demand Balancing the Market
- 6. Chapter 6 Section Main Menu Excess Demand • Start to raise price once lines get longer, earn more profit and work harder to supply more – Raise price to $1.50, smaller lines, but meeting the needs of the people (market now at equilibrium) • Excess Demand is present, businesses will raise prices to close the gap • Keep the price at that level until a factor changes
- 7. Chapter 6 Section Main Menu Excess Supply • Price too high, excess supply happens – Quantity supplied is more than quantity demanded • $2/slice means 250 slices supplied w/ demand at 150 slices – 100 extra slices • Price discourages consumers to buy the pizza • Business will cut prices, demand will rise – Reach equilibrium
- 8. Chapter 6 Section Main Menu Priceperslice Equilibrium Point Finding Equilibrium Price of a slice of pizza Quantity demanded Quantity supplied Result Combined Supply and Demand Schedule $ .50 300 100 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $.50 Slices of pizza per day 0 50 100 150 200 250 300 350 Supply Demand $2.00 $2.50 $3.00 150 100 50 250 300 350 Surplus from excess supply $1.50 200 200 Equilibrium Equilibrium Price a Equilibrium Quantity $1.00 250 150 Shortage from excess demand Balancing the Market
- 9. Chapter 6 Section Main Menu Government Intervention • Price Ceilings – a maximum price that can be legally charged for a good or service • Price Floor – a minimum price for a good or service
- 10. Chapter 6 Section Main Menu Price Ceilings • Government puts these on goods/services considered “essential” • New York City placed ceilings on apartments (Rent Control) – Put in place b/c of housing crisis in 1940s and after WWII – Reduces quantity and quality of housing – Helps some and hurts some (many poor households) – Price set below equilibrium (excess demand) – Graph on Board
- 11. Chapter 6 Section Main Menu The Problems W/ Price Ceilings • Price does not reach equilibrium, market decides which 20,000 households get an apartment and which do not – Few renters w/ greatest need actually get help – Bribery, discrimination, etc. to get apartments • 1990s – NYC changed rent laws for wealthy • Landlords have no incentive to make apartments nice
- 12. Chapter 6 Section Main Menu Ending Rent Control • Price reaches equilibrium ($900) then supply would hit 30,000 – People that can afford $900 could find vacant apartments – Landlords have incentive to make apts. nice • People in rent controlled apts. would be forced out b/c of price increase
- 13. Chapter 6 Section Main Menu Price Floors • Min. Wage – min. price an employer can pay a worker – States can set theirs higher than fed. min. wage – If min. wage is set above the market equilibrium, decrease in employment – Graph
- 14. Chapter 6 Section Main Menu Price Floors • Market equilibrium price at $4.50, but min. wage at $5.15 – Excess supply of labor (4 mil. workers) – Businesses employ 2 mil. fewer workers at the min. wage price
- 15. Chapter 6 Section Main Menu Price Supports in Agriculture • Until 1996, U.S. set minimum prices for different products – These price floors were not legal limits – Price fell below the floor, govt. would buy up excess crops (created demand) • After 1996 – Northeast states created Northeast Dairy Compact • Guarantee a min. price for milk made on these farms
- 16. Chapter 6 Section Main Menu Changes in Market Equilibrium • How do shifts in supply affect market equilibrium? • How do shifts in demand affect market equilibrium? • How can we use supply and demand curves to analyze changes in market equilibrium?
- 17. Chapter 6 Section Main Menu Understanding Shift in Supply • Example – CD players in the early 1980s were around $1,000 – New technology for making them reduced the cost and increased supply of them – Shifting the supply curve to the right
- 18. Chapter 6 Section Main Menu Finding a New Equilibrium • Surplus – quantity supplied is greater than quantity demanded (excess supply) • New Graph pg 134-135
- 19. Chapter 6 Section Main Menu Changing Equilibrium • Prices fall, more people buying the product, equilibrium moved down to the right • Equilibrium is not an unchanging point due to factors changing in production – When the supply or demand curve shifts, producers try and reach the new equilibrium
- 20. Chapter 6 Section Main Menu Fall in Supply • Steel prices go up, workers strike, new taxes on automobiles – All these make the supply of cars go down – Shift curve to the left – Disequilibrium happens
- 21. Chapter 6 Section Main Menu Shifts in Demand – Problem w/ Excess Demand • Day after Thanksgiving sales cause demand curve to shift to the right • Shortage – same as excess demand • Graph pg. 136
- 22. Chapter 6 Section Main Menu Problem of Excess Demand • Excess demand appears as long lines/empty shelves • Search Costs – financial and opportunity costs consumers pay when searching for a good or service – Driving to stores or calling around to stores
- 23. Chapter 6 Section Main Menu Return to Equilibrium • Businesses raise prices to bring demand down – Consumers can push prices up if there is “bidding” in the market • Houses, antiques, art, etc. • Reach new equilibrium price
- 24. Chapter 6 Section Main Menu Fall in Demand • Fad is over, demand falls drastically • Excess demand switches to excess supply • Demand curve shifts to the left – Businesses cut prices to reach new equilibrium
- 25. Chapter 6 Section Main Menu The Role of Prices • What role do prices play in a free market system? • What advantages do prices offer? • How do prices allow for efficient resource allocation?
- 26. Chapter 6 Section Main Menu Prices in a Free Market • Prices help move land, labor, and capital into the hands of the producers and finished goods into the hands of buyers • Example – Go to the store to buy an item – Compare prices at different stores or shop online
- 27. Chapter 6 Section Main Menu Advantages of Prices – Price as an Incentive • Buyers and sellers watch supply and demand to determine when to buy something – Depending on the price change determines how they react – Prices also show whether or not the supply is high or low • Example – Prices get high for a product and people still buying it – Supply goes up
- 28. Chapter 6 Section Main Menu Prices as Signals • Stop light example for Suppliers – Green Light – high price tells producers to make more • New suppliers join market – Red Light – low price shows they need to switch resources to make a diff. product • Stop light for Consumers – Green Light – low prices means low opportunity cost – Red Light – high prices means they need to more careful about purchasing the good
- 29. Chapter 6 Section Main Menu Flexibility • Prices are flexible when the supply or demand changes • Supply Shock – a sudden shortage of a good – Excess demand can’t be met by the low supply – Rationing – allocating scarce goods/services using criteria other than price • Basis of central planning • Easiest way to solve the problem is raise prices – Those who can afford it still and need it, will buy it
- 30. Chapter 6 Section Main Menu Price System is “Free” • Distribution system based on prices costs nothing – Central Planning requires many people to figure out how resources will be distributed • Soviet Union did it (GOSPLAN), U.S. did it during WWII (Office of Price Administration) – Free Market pricing distribute goods through decisions of consumers
- 31. Chapter 6 Section Main Menu Wide Choice of Goods • Market-based economy gives consumers a variety of goods to choose from – Prices allow them to choose b/w goods • Command Economy has one organization deciding what goods are made – Also determine the price
- 32. Chapter 6 Section Main Menu Rationing and Shortages • Goods in Soviet Union were cheap, but not always around – U.S. had temporary price controls during WWII, long lines and wait for hours for goods • Rationing was expensive for govt. and consumers unhappy • Price based system would have left some people out of housing or food b/c prices would be too high
- 33. Chapter 6 Section Main Menu The Black Market • Govt. can’t control supply of all goods during rationing – Butcher sells meat w/o using ration points or a landlord wants a cash “bonus” or an extra 2 months rent in cash • Black Market – goods/services are sold illegally – Consumers pay more for a good when rationing makes it difficult to get
- 34. Chapter 6 Section Main Menu Efficient Resource Allocation • Economic resources (land, labor, capital) will be used for their most valuable purpose – Resource use adjusts w/ changing demands of consumers • Highest bidder will bring high profit to resource owner – Resources will then flow to the uses that are highly valued by consumers – Very efficient
- 35. Chapter 6 Section Main Menu Prices and Profit Incentive • Example – Hot summer predicted, so more air conditioners and fans are bought than usual, making price go up – Oil and natural gas reserves would be tapped in order to fuel them – Needs for certain goods would go up created higher prices and profit of suppliers
- 36. Chapter 6 Section Main Menu The Wealth of Nations – Adam Smith 1776 • Smith said that the reason a baker would provide people w/ bread/food is b/c he would make a profit – Businesses simply find out what people want and provide it w/ the right price – This system has been the most efficient in the modern era
- 37. Chapter 6 Section Main Menu Market Problems • 1. imperfect competition can affect prices and higher prices can affect consumer decisions – Only a few people selling a product, then there will be a high price • 2. Spillover Costs (Externalities) – costs of production that affect people who have no control over how much of a good is produced – Pollution of air or water • 3. Imperfect information – Consumers do not have good info. about products