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

Market Equilibrium—Where the quantity
supplied and quantity demanded for a
product are equal at the same price.
QD = QS
– The needs of both supplier and consumer are
satisfied.
– The forces of supply and demand are in balance.
– Question: How do producers know if their price is
too high or too low? In other words, how do they
know if the price they have set is at market
equilibrium or not?
Surpluses

Surplus—Exists when the quantity
supplied exceeds the quantity
demanded at the price offered.
QD < QS
– 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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Quantity
Shortages

Shortages—Exists when the quantity
demanded exceeds the quantity supplied at
the price offered.
QD > QS
 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
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Shortage QS<QD
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Quantity
Shifts in Equilibrium
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?
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Managing Prices

Price Ceilings—A government regulation
that establishes an artificial maximum price
that is lower than market equilibrium for a
particular good or service.
Price Floors—A government regulation that
establishes an artificial minimum level for
prices that is higher than market
equilibrium.
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).