Transcript prices - Pearland ISD

PRICES
Changes in Market Equilibrium
Chapter 6 Section 2
PRICES
• Objectives:
• Identify the determinants that create
changes in price.
• Explain how a market reacts to a fall in
supply by moving to a new equilibrium.
• Explain how a market reacts to shifts in
demand by moving to a new
equilibrium.
PRICES
• Price Supports
– Government subsidizes an industry to help
the market –most common: agricultural
supports
– Gov’t. sets a target price. The farmer sells the
crops on the open market and the Gov’t.
subsidizes (or pays the difference) to the
farmer for what he should have gotten
(according to the target price).
PRICES
• Price Supports: example
• Farmer sold 10,000 bushels of corn on the
open market at $ 3.00/bushel.
• The Gov’t. had a target price of $
4.00/bushel.
• Farmer gets $ 30,000 on open market and
the Gov’t. sends him a check for $
10,000 for the difference.
PRICES
• Price Freeze
• Another type of Price Control.
• A government restriction placed on
product that will keep prices from
increasing.
• This happens during emergencies {911}.
PRICES
• After 911, the airports were shut down for a few
days. People were stranded in places with no
airplanes available to get them to their
destination. Rental Car demand increased
tremendously. Prices of rental cars sky-rocketed.
The Gov’t. placed a price freeze on rental cars,
saying that the prices of the rental must remain
where they were as of the day before.
• This is done to prevent Price Gouging – taking
advantage of a emergency situation for profit.
PRICES
• Economists say that a market will tend to
move toward equilibrium, which means
that price and quantity will gradually
move toward their equilibrium levels.
PRICES
• Shortage (excess demand) will lead firms
to raise prices, higher prices induce the
Qs to rise and the Qd to fall until the
two are equal.
• Surplus (excess supply) will force firms to
cut prices. Falling prices will cause Qd
to rise and Qs to fall until they are
equal.
PRICES
• Assuming that a market starts at
equilibrium, there are 2 factors that can
push it into disequilibrium.
– A shift in the Demand Curve
– A shift in the Supply Curve
PRICES
• Factors that shift the Supply Curve:
– Technology
– New government taxes & subsidies
– Changes in price of the raw materials
– Labor used to produce the good
PRICES
• Since market equilibrium occurs at the
intersection of a demand curve and a
supply curve, a shift of the entire supply
curve will change the equilibrium price
and quantity.
• A shift in the supply curve to the left or the
right creates a new equilibrium.
PRICES
• Supply Curve shifts to the left (decrease)
or the right (increase).
PRICES
• If there is an increase in the supply (to the
right)…EP (Equilibrium Price) will be
lower and EQ (Equilibrium Quantity)
will increase.
• If there is a decrease in the supply (to the
left)…EP will rise and EQ will decrease.
PRICES
• Demand Curve shifts to the Left
(decrease) or the right (increase).
PRICES
• If there is an increase in Demand (moves
to the right) EP will rise and EQ will
increase.
• If there is a decrease in Demand (moves
to the left) EP will lower and EQ will
decrease.
PRICES
• IF both curves shift, the result depends on
their relative magnitudes.
• Normal Supply and Demand Curves…
• IF Supply increases (moves right) and
Demand decreases (moves to the
left)…
• EP will fall and EQ will increase.
PRICES
• IF we have a Vertical Demand Curve that
is inelastic… i.e. insulin
– Demand would not change, Supply could
decrease/increase.
• IF we have a Horizontal Demand Curve
that is elastic… i.e. garden veggies
– Demand would stay the same and Supply
could decrease/increase.
PRICES
• IF we have a Vertical Supply Curve that
has a natural restriction on product…
i.e. oranges/fruit.
– Supply would not change but Demand could
rise or fall.
• IF we have a Horizontal Supply Curve that
has no natural restriction on product…
i.e. computers.
– Supply would not change, but Demand could
increase or decrease.
PRICES
• Demand is a measure of how much a
consumer is willing and able to buy a
product at every price.
• Sometimes you may get a product for less
than you would have been willing to
pay for it.
PRICES
• Consumer Surplus
– The difference between what people are willing to pay
and the market price.
• You go to the store to buy a product. You have a
certain amount of money set aside to pay for the
product. But, you end up paying less than what
you had budgeted for the product. After buying the
product you have money left over.
PRICES
• Producer Surplus
– The same goes for a producer. They often
willing sell an item for a price lower than
what they end up receiving.
– A used car sales man haggling with a customer over
the price of a used car. He may have a rock bottom
price that he won’t go below, but the buyer ends up
taking the car for a price higher than that rock
bottom price. The car sales man just won. He got
more than he thought he would for the car.
PRICES
• Producer Surplus
– Difference between the market price which
the producer receives for their product and
the price at which they are willing to sell their
goods.
PRICES
• Tax Incidence
– Who really pays for taxes added onto the
production process?
– We do in the end.
– This is called incidence of tax.
– After the tax is added, the producer can not
produce as much as before.
– Sometimes, the producer will pay part of the
tax, other times the consumer pays all of it.
PRICES
• Incidence of Tax is determined mostly by
the elasticity of the demand curve.
• Elastic Product – Garden Veggies
– Seller pays $ .40 and consumer pays $ .60 –
assuming a $ 1.00 tax is added on
• Inelastic Product – Insulin
– Seller may pay $ .10 and the consumer would
pay the other $ .90 of the tax that was added
on (assuming it was a $ 1.00 tax)