Transcript Economics Chapter 6 Bringing Supply and Demand Together

Economics
Chapter 6
Prices
Chapter 6
Section 1
Combining Supply
And
Demand
A market Equilibrium is the
point at which quantity
supplied and quantity
demanded are equal.
At equilibrium the market
for a good is stable.
At that point, buyers are
willing to buy at the same
price and quantity at which
sellers are willing to sell.
This price is the equilibrium
price.
On a graph, the equilibrium point
is located at the point where the
supply curve and demand curve
intersect.
A market is said to be in
disequilibrium when the quantity
supplied does not equal the
quantity demanded at a certain
price.
Balancing the Market
• Equilibrium
Supply
Price
Equilibrium
Demand
Quantity
Supply
Price
Equilibrium
Demand
Quantity
Equilibrium on the combined
demand and supply curve is where
quantity demanded is equal to
quantity supplied.
Disequilibrium occurs
when quantity supplied is
not equal to quantity
demanded in a market.
Disequilibrium can produce
one of two outcomes – excess
demand or excess supply.
Market Disequilibrium
These are also the two causes for
disequilibrium:
• Excess Demand
• Excess Supply
The problem of excess demand
occurs when quantity demanded
is more than quantity supplied.
A price lower than the
equilibrium price will encourage
buyers and discourage sellers.
Prices will rise because sellers
hope to increase their profits.
The problem of excess supply
occurs when quantity supplied
exceeds quantity demanded.
Prices will fall because sellers
need to sell their supply.
Whenever there is excess in
supply or demand, market forces
work to create equilibrium.
In some cases the government
steps in to control prices. These
interventions appear as
price ceilings and price floors.
Sometimes governments attempt
to control prices in a market.
Rent control is a program put in
place by government to prevent
inflation during a housing
crisis.
It is a type of program called a
price ceiling, which is set by
law, making essentials available
to buyers.
Rent Control = Price Ceiling
One well known price floor is the
minimum wage, which sets the
minimum price an employer can
pay an employee.
The Federal Government sets the
level for the minimum wage in
response to rising costs and
income.
Minimum Wage= Price Floor
Chapter 6
Section 2
Changes in
Market
Equilibrium
Section 1 described disequilibrium
that occurs along a demand or
supply curve.
If a price is higher or lower that
equilibrium price, market forces
push prices back towards
equilibrium.
Sometimes, however, changes in
market conditions lead to the shift
of an entire demand curve or
supply curve.
This means that the quantity
demanded or supplied is now
different at all prices levels.
These changes also push a market in
disequilibrium, and market forces tend
to bring it back to equilibrium.
• Shifts in Supply
– Technology, Cost, Government,
Imports, Expectations, # of suppliers
• Shifts in Demand
– Income, Expectations, Population,
Trends/Advertising, Substitutes,
Complements
Shifts in Supply
• Understanding a Shift
Old
Equilibrium
New
Equilibrium
Excess Supply
Surplus
Producers react to the surplus by
lowering prices, and eventually
price and quantity reached a new
equilibrium.
A Fall in Supply
An outward shift in demand can be
caused by a fad, such as the surge
in popularity of a new toy.
Buyers want more toys than are
supplied, and a shortage occurs.
A shortage is when quantity
demanded is greater than quantity
supplied.
During a shortage, producers and
stores tend to raise prices.
The market price will rise until
quantity supplied equals the
quantity demanded, and a new
equilibrium is established.
Shifts in Demand
Excess Demand
–shortage
–Search Costs
A Fall in Demand
Analyzing Shifts in Supply and
Demand
Graph A: A Change in Supply
$800
$600
a
b
$400
Original supply
Price
c
$200
0
New supply
Demand
1
2
3
Output (in millions)
4
5
Analyzing Shifts in Supply and
Demand
Graph B: A Change in Demand
$60
$50
Supply
$40
Price
$30
c
$20
a
b
$10
New demand
Original demand
0
100
200
300
400
500
Output (in thousands)
600
700
800
900
Chapter 6
Section 3
The
Role of Prices
The Role of Prices in a Free
Market
Advantages of Prices
Prices provide a language for
buyers and sellers.
4 Advantages:
Four Advantages:
First, prices are like signals that send
information to buyers and sellers.
A low price is a signal to reduce the
supply or leave the market.
For buyers, a low price is a signal to
buy, and a high price is a signal to
think before buying.
Second, the advantage of prices
is that they are flexible.
Prices can usually change more
quickly than production levels.
A supply shock occurs when
there is a sudden shortage of a
good, such as wheat or gasoline.
Because supply usually cannot be
increased quickly, increasing prices
helps resolve excess demand.
So, Third, the advantage of prices
is that they are their own
incentive.
Fourth, the Price system is free
for all, as the system adjusts
itself under the correct actions.
Rationing is a system for
allocating goods and services
using tools other than price.
Centrally planned communities
use rationing, not price to
distribute goods and services.
Rationing is expensive to
administer and it tends to lead to
only a few products; not variety.
Efficient Resource Allocation
• Resource Allocation
Market Problems
Imperfect competition –
Prices do not always work
efficiently in markets in which
there is not much competition,
or in which buyers and sellers
do not have enough information.
Spillover costs –
Another problem is spillover
costs, such as air and water
pollution, that “spill over” onto
other people who have no
control over how much of a
good is produced.
Producers do not usually pay
spillover costs, and the extra
costs will be paid by
consumers.
Another problem with price
correction is making decisions
after receiving imperfect
information
The graphic above demonstrates
using price as a signal by which
to make market decisions.