Transcript Power Point

Chapter 6
Prices: Combining Supply
and Demand
Combining Supply and Demand
 Buyers
and sellers have to meet at a
certain point
 This point is called equilibrium
 Equilibrium – price at which Qs = Qd
– “Market Clearing Price”
 At
this point, the market for a good
is stable
How do we find equilibrium?
 There
will be a nice point on the
“X” on the graph!
How do we find equilibrium?
 Disequilibrium
– when quantity
supplied does not equal quantity
–Excess Demand (Shortage) –
quantity demanded is more
than quantity supplied (prices
beneath equilibrium price)
Excess Demand
 If
you were selling delicious
Sweet Onion Chicken Teriyaki
sandwiches for $2.00 a piece…
Excess Demand
 You
may have 500 people lined
up outside of your Subway to buy
Excess Demand
 However,
you can only make 250
during the day… What do you do?
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!
Excess Demand
 The
point at which you are only
making enough sandwiches to
feed the customers who want
them is equilibrium
Excess Supply
 Excess
Supply (Surplus) –
Quantity supplied is more than
quantity demanded (prices above
the equilibrium price)
Excess Supply
 This
would be if you were
producing 250 sandwiches a day,
but only had 150 people coming
 You would reduce your prices to
meet the demand (otherwise, it’s
a huge waste of resources!)
Any Typical High School Boy
This is stupid.
Why do we
have to learn
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
 Market equilibrium is the “invisible
 Companies only produce what
society needs because that is best
for their profits!
With Ashlee Simpson
Government Intervention
 In
the American
mixed economy,
government still
takes actions to
protect consumers
from businesses
Examples of Interventions
 Price
Ceilings – a maximum that
can be legally charged for a
–Rent Control – a type of price
ceiling where the government
sets a maximum legal rate for
Problems with Price Ceilings
 When
you set the price lower than the
market allows:
–Quantity supplied goes down, as
businesses don’t want to lose
–Quantity demanded goes up, as
consumers want to take advantage
of low prices
–This all creates…
Examples of Interventions
 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
Problems with Price Floors
 If
the government sets a price floor
above market equilibrium, people
stop consuming that product (or
 So if the government sets minimum
wage too high, for example, you get
And Now for Something
Completely Different
2 Minute Sketches
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”
 You will write a 2 minute script
illustrating the concept I assign you
 Everyone must have a line!
The Role of Prices
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
 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
 The
Price System is Flexible –
prices change with supply and
 The Price System is Free – the
price system does not require
large government agencies to
oversee the distribution of goods
Problems with Other Systems
 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
Problems with Other Systems
 The
Black Market – the market
where goods are sold illegally
–Black Markets encourage higher
prices, and also defeat the
purpose of a command
Typical High School Boy
This is stupid. I
hate economics.
It doesn’t
Here’s Why it Matters
 The
Price System allows
resources to be allocated (given
out) efficiently
 All resources are placed where
they are most valuable to
 All without the intrusion of the
government in your life!
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?
Adam Smith, Man of Astounding
Genius and Economic Brilliance for
His Time, and for Ours as well.
Because they will
make a profit!
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
Possible Disadvantages
 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