Transcript The Price System (Markets)

Economics Unit 4, Lesson 1
The Price System
(Markets)
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Potential Buyers
Potential Sellers
Markets
The interaction of buyers and sellers
determines the price and quantity of
most goods in a market system.
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Buyers and sellers have
opposite goals.
Buyers want the lowest price.
Sellers want the highest price.
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Markets
Draw Supply & Demand
Demand Schedule
$
QD
10.00
60
20.00
40
30.00
20
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Supply Schedule
$
QS
10.00
20
20.00
40
30.00
60
Market
$ 30
S
EP 20
10
D
20
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40
EQ
60
Q
With supply and demand both
on graph, we now have a
market.
Market equilibrium – where
quantity demanded and quantity
supplied are equal
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Based on 2 Assumptions
1. Everything in market has a price.
2. Price is best measure to answer
the three basic economic
questions.
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Prices act as signals.
Signals to adjust
– Demand
– Supply
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Disequilibrium
QS = QD
This creates a shortage or a
surplus.
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Surplus
• A price above equilibrium creates a
surplus.
• A surplus is when QS is greater
than QD.
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Surplus
Excess Supply
QS > QD
P
S
30
EP 20
D
QD
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40
EQ
Q
QS
Shortage
• A price below equilibrium created a
shortage.
• Shortage is when QD is greater than QS.
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Shortage
Excess Demand
$
QD > QS
S
EP20
10
D
QS
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40
EQ
QD
Q
Objectives
1. Identify the determinant that causes a
change in equilibrium price.
2. Construct a market, and graph a change
in supply and demand with new
equilibrium.
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What does it take to make a market?
• Buyer = demand
• Seller= Supply
Draw a market and label
• P
• Q
• S&D
• EP & EQ
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Product: Toothpaste
$
EP
S
E
D
EQ
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Q
Show what would happen if Crest
has a very successful ad campaign.
Change in D?
or
Change in S?
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Product: Toothpaste
$
S
EP
E
1
1
D
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EQ
1
Q
Product: Toothpaste
$
S
EP
2
EP
E
E
2
1
1
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D
EQ EQ
D
2
1
Q
What happened to EP?
Increased
To EQ?
Increased
So we can generalize and say if…
D
EP 
EQ 
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Show what would happen if the
price of seaweed goes up.
Change in D?
or
Change in S?
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Product: Toothpaste
$
S
E
EP
1
1
D
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EQ
1
Q
Product: Toothpaste
S2
$
S1
E
EP
2
EP
2
E
1
1
D
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EQ EQ
1
Q
This was caused by a change in
the cost of inputs. Seaweed is a
major ingredient of toothpaste.
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What happened to EP?
Increased
To EQ?
Decreased
So we can generalize and say if…
S
EP 
EQ 
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Show what would happen if a new
machine can harvest seaweed faster
and cheaper.
Change in D?
or
Change in S?
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Product: Toothpaste
$
S
EP
E
1
1
D
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EQ
1
Q
Product: Toothpaste
$
S1
S2
E
EP
EP
1 2
1
D
EQ1
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1
Q
What happened to EP?
Decreased
What happened to EQ?
Increased
So we can generalize and say if…
S
EP 
EQ 
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Show what would happen if
the Surgeon General
announced that toothpaste
was harmful to your heart.
Change in Demand
or
Change in Supply?
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Product: Toothpaste
$
S1
E
1
D
1
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Q
Product: Toothpaste
$
E
EP2
P1
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S
E
1
D
EQ2EQ 2
D
1
Q
What happened to EP?
What happened to EQ?
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Both decreased.
We can generalize and say if…
D
EP 
EQ 
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