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Notes: Chapter 6- Price
I.
Equilibrium
A. Point at which quantity demanded and quantity supplied are equal
B. At equilibrium the market is stable
C. Disequilibrium
1.
When quantity supplied does not equal quantity demanded in a
market
2.
Will cause excess supply or demand
a. Excess demand = quantity demanded > quantity supplied
b. Excess supply = quantity supplied > quantity demanded
II.
Government Intervention
A. Price ceiling
1.
Maximum price that can legally be charged for a good
2.
Ex: rent controls for apartments in New York City
3.
Leads to shortages because there are no incentives to build more
apartment buildings
B. Price floor
1.
A minimum price for a good or service
2.
Minimum wage
a. Minimum price that an employer can pay a worker for an hour
of labor
b. Today it is $5.85
3.
There are price floors for certain crops
III.
Changes in Market Equilibrium
A. Equilibrium is like a moving target that changes as market conditions change
B. Changes in price
1.
Ex: CD players have decreased tremendously since they came out
2.
Create a new equilibrium
3.
Surplus
a. Situation where quantity supplied > quantity demanded
b. Also known as excess supply
4.
Sellers are always looking for the new equilibrium
a. Ex: sales
C. A number of factors can cause a fall in supply
1.
↑ cost of inputs
2.
↑ cost of labor
D. Shifts in demand
1.
Excess demand
a. Shortage
i. Situation where quantity demanded > quantity supplied
ii. Also known as excess demand
b. Search costs
1
i. Financial and opportunity costs consumers pay when
searching for a good or service
ii. Ex: driving around looking for a product (ex: a
Nintendo Wii)
E. When a fad passes you go from excess demand to excess supply
IV.
The Role of Prices
A. Advantages of prices
1.
Prices are a standard measure of value
2.
Prices = incentives
3.
Prices = signals of demand and what sellers will supply for these
demands
4.
Flexibility
a. Ex: can easily increase to solve the problem of excess demand
b. Supply shock
i. Sudden shortage of a good
ii. Can be corrected by rationing
c. Rationing
i. System of allocating scarce goods and services by using
criteria other than price
ii. Ex: during World War II to ensure the availability of
vital goods
5.
The price system is “free”- this does not happen in a communist
system
6.
Prices lead to efficient resource allocation
B. A wide choice of goods
1.
Choice is a big part of these decisions – not in central planning
2.
Black market
a. A market in which goods are sold illegally
b. Ex: drugs and prostitution
C. Prices, profits, and incentives
1.
Emphasized by Adam Smith in The Wealth of Nations (1776)
2.
Market problems
a. Imperfect competition
b. Spillover costs
i. Costs of production that effect people who have no
control over how much of a good is produced
ii. Also known as externalities
c. Imperfect information
2