Transcript SSEMI2 The student will explain how the Law of Demand, the Law

SSEMI2 THE STUDENT WILL EXPLAIN
HOW THE LAW OF DEMAND, THE LAW
OF SUPPLY, PRICES, AND PROFITS
WORK TO DETERMINE PRODUCTION
AND DISTRIBUTION IN A MARKET
ECONOMY.
MARKET CLEARING
(EQUILIBRIUM) PRICE
The student will be able to describe how buyers
and sellers determine market clearing (equilibrium)
price.
The buyer’s demand curve in a market is
determined by adding together all the quantities
consumers are willing and able to purchase at
each price in the market.
The seller’s supply curve in a market is determined
by adding together all the quantities producers are
willing and able to sell at each price in the market.
MARKET CLEARING
(EQUILIBRIUM) PRICE
The market clearing or equilibrium price is found at the
intersection of the market demand and supply curves.
This is the point at which the quantity demanded by
consumers is equal to the quantity supplied by producers.
On the graph below, the equilibrium price is shown at Ep and
the equilibrium quantity is shown at Eq.
MARKET CLEARING
(EQUILIBRIUM) PRICE
Equilibrium price and quantity can also be determined by
looking at demand and supply schedule charts. Here is an
example using the burger chart from the last element with the
quantities supplied and demanded included:
MARKET CLEARING
(EQUILIBRIUM) PRICE
In the schedule shown above, the market clearing price
(equilibrium price) is $2.25 because this is the price at which
the quantity supplied equals the quantity demanded in the
market.
SSEMI3 THE STUDENT WILL
EXPLAIN HOW MARKETS,
PRICES, AND COMPETITION
INFLUENCE ECONOMIC
BEHAVIOR.
B. EXPLAIN AND ILLUSTRATE ON A GRAPH
HOW PRICE FLOORS CREATE SURPLUSES
AND PRICE CEILINGS CREATE SHORTAGES.
PRICE CONTROLS
1. governments sometimes view the equilibrium price in a
market as too high or too low.
2. government price controls include price floors and price
ceilings.
3. Government price controls occur when a local, state, or
national government decides to set a legal maximum or
legal minimum price in a market for a good or service
PRICE FLOORS
1. Price Floors: A price floor is a legal minimum price for a
good, service, or factor of production.
2. Charging or paying a price below the price floor is illegal
and can carry a penalty under the law.
3. most familiar price floor is the minimum wage. In the
United States, it is illegal to pay workers less than $7.25 per
hour.
4. Price floors create a surplus in the market.
5.The government’s argument for a minimum wage stems
from a belief that the market wage is not high enough to
provide a reasonable standard of living for low skilled
workers.
SURPLUS
1. Surplus: A surplus occurs when the quantity supplied of
a good is greater than the quantity demanded of the
good.
2. Price floors typically create a surplus because the
government price is set above the equilibrium price in the
market and consumers do not want to pay a price higher
than what they think the good is worth.
PRICE CEILINGS
1. Price Ceilings: A price ceiling is a legal maximum price for
a good, service, or factor of production.
2. The most familiar price ceiling is the rent control.
3. In order to ensure that some housing is available to lower
income people, the city designates some housing units as
rent control units. Owners of these units cannot legally rent
the units at price higher than the price ceiling.
4. Price ceilings usually create shortages in the market.
SHORTAGE
1. Shortage: A shortage occurs when the quantity supplied of
a good is less than the quantity demanded of the good.
2. Price ceilings typically create a shortage because the
government price is set below the equilibrium price in the
market and sellers do not want to sell at a price lower than
what they think the good is worth.
PROBLEMS WITH
PRICE CONTROLS
1. Problems with price controls: Price controls will often
create underground markets.
2. If the price floor minimum wage is truly too high for the
market to bear, both workers and employers will choose to
trade in the underground market.
3. This is bad for government because it will not collect taxes
on that income earned and it will have to spend resources to
enforce the price floor.
4. Eventually, the number of rent controlled units will decline
as frustrated landlords convert their buildings to
condominiums or sell off their property for alternative uses.
Equilibrium wage in the market for labor is $5.15 per hour and there are 1000
workers employed at this wage.
Government price floor (minimum wage) is set at $7.25 per hour.
At a wage of $7.25 per hour, employers only demand a quantity of 500 workers
while there are 1500 workers who want to work at $7.25 per hour.
This wage creates a surplus of 1000 workers in the market [1500 (Quantity
Supplied) – 500 (Quantity demanded)].
Equilibrium rent in the market for apartments is $700 per month and there are 1000
unit available at this rent.
The government price ceiling (rent control) is set at $500 per month.
At a rent of $700 per month, there are 1000 units tenants willing to rent and 1000
units landlords are willing to rent to them.
At a rent of $500 per month landlords are only willing to supply a quantity of 500
workers units while there are 1500 units tenants want to rent.
This price ceiling rent creates a shortage of 1000 units in the market [1500 (Quantity
Demanded) – 500 (Quantity supplied)].
SSEMI3 THE STUDENT WILL
EXPLAIN HOW MARKETS, PRICES,
AND COMPETITION INFLUENCE
ECONOMIC BEHAVIOR.
C. DEFINE PRICE ELASTICITY OF DEMAND
AND SUPPLY.
PRICE ELASTICITY
Price elasticity of demand refers to the responsiveness of
consumers to changes in price.
Market demand is inelastic when the percentage change in
the price of a good is greater than the percentage change in
quantity demanded of the good.
For example, if a diabetic needs insulin in order to live, they
are likely to purchase just as much even if the price rises
significantly.
DEMAND ELASTICITY
Market demand is elastic when the percentage change in the
price of a good is less than the percentage change in
quantity demanded of the good.
For example, if the price of snack you buy goes up, you will
likely buy a much smaller quantity because you immediately
substitute another snack for it since you have so many
choices.
SUPPLY ELASTICITY
Market supply is inelastic when the percentage change in the
price of a good is greater than the percentage change in
quantity demanded of the good.
We expect producers to be motivated to supply a greater
quantity when price rises. However, some producers may be
unable to respond to the increase in price.
For example, a freelance journalist working from home may
want to write ten more articles a week when the price of
freelance pieces rises, unfortunately she may not be able to
respond because she lacks the hours in the day to produce
the quantity
SUPPLY ELASTICITY
Market supply is elastic when the percentage change in the
price of a good is less than the percentage change in
quantity demanded of the good.
For example, if a company has a factory and it is currently
operating at 70% of its capacity and the price of its product
rises in the market, it can utilize some of its excess capacity
quickly to take advantage of the higher prices
INELASTIC DEMAND
What does inelastic
demand look like
graphically?
The first graph shows
relatively inelastic demand
which means a price
change on the demand
curve results in a very
small change in quantity
demanded.
The second graph shows
perfectly inelastic demand
which means a price
change on the demand
curve results in no change
in quantity demanded
ELASTIC DEMAND
What does elastic demand
look like graphically?
The first graph shows
relatively elastic demand
which means a price change
on the demand curve results
in a very large change in
quantity demanded.
The second graph shows
perfectly elastic demand
which means any price
increase or decrease no
longer intersects the demand
curve and there is no quantity
demanded at any other price.
INELASTIC SUPPLY
What does inelastic supply look like
graphically?
The first graph shows relatively
inelastic supply which means a price
change on the supply curve results
in a very small change in quantity
supplied.
The second graph shows perfectly
inelastic supply which means a price
change on the supply curve results
in no change in quantity supplied.
ELASTIC SUPPLY
What does elastic supply look
like graphically?
The first graph shows
relatively elastic supply which
means a price change on the
supply curve results in a very
large change in quantity
supplied.
The second graph shows
perfectly elastic supply which
means any price increase or
decrease no longer intersects
the supply curve and there is
no quantity supplied at prices
higher or lower than the
current price.