Transcript Determining and Managing Prices

Thoughts—Fill in blanks
Consumers tend to demand
(more/less) of a product when the price
is low and (more/less) when the price is
high.
 Producers tend to supply (more/less) of
a product when prices are high and
(more/less) when prices are low.

Determining Prices 5.2

Market Equilibrium—Where the
quantity supplied and quantity
demanded for a product are equal at the
same price.
– The needs of both supplier and consumer
are satisfied.
– The forces of supply and demand are in
balance.
Surpluses 5.2

Surplus—Exists when the quantity
supplied exceeds the quantity
demanded at the price offered.
– Producers are willing to supply more of a
product at a higher price than consumers
are willing to buy at that price, therefore
there is “extra” product left over.
Surplus QS>QD
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D
Price
S
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2
1
10
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70
Quantity
Shortages 5.2
Shortages—Exists when the quantity
demanded exceeds the quantity
supplied at the price offered.
 Consumers are wanting more product at
a lower price than suppliers can
profitably supply, therefore, there is no
product left to sell.
 Who gets the product? How decided?

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D
Price
S
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Shortage QS<QD
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Quantity
Shifts in Equilibrium 5.2
Key: The equilibrium point also shifts to
the new intersection of the curves.
 1996 Christmas season—Tickle Me
Elmo has enormous demand with major
shortages—What were the results?

Managing Prices

Price Ceilings—A government
regulation that establishes a maximum
price for a particular good or service.
– Ex. Affordable housing/ Rent controls
Price Floors—A government regulation
that establishes a minimum level for prices.
Ex. Agricultural prices
Consequences of Setting Prices
Interfering with Supply/Demand can
cause unintended consequences and
impair equilibrium.
 Ex. Affordable housing--$600
ceiling/Equilibrium price is $800.

– Supply of housing shrinks, Why?
• Profits—Up or down?
• New housing supply – Up or down?
• Condition of existing rental units?
Rationing
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Rationing– A system in which a government
or other institution decides how to distribute a
product.
Ex. WW II—Tires, sugar, butter, coffee
Ex. Cuba today under communism/socialism
Ticket prices to football
games(Supply/Demand?
Ration tickets to students to keep affordable
Consequences: Unfair, Expensive, Creates
black markets
Consequences of Rationing
1.
2.
Unfairness—Gives special treatment
to students, alumni, etc.
Cost—Can be costly to implement
Takes a lot of hours to track/Hire people.
3. Black Markets—Rationing tends to
encourage illegal charging of higher than
official prices for an event, product,
(Unfair).
(Opportunity for fakes).