Download Equilibrium 2015

THE PRICE SYSTEM
Demand and Supply Working
Together
Chapter 6, Section 1
Introduction
What role do prices play in a free market
economy?
In a free market economy, prices are
used to distribute goods and resources
throughout the economy.
Chapter 6, Section 1
ROLE OF
THE PRICE SYSTEM
Signals
and information
Flexibility
Efficiency
Chapter 6, Section 1
Incentives
for producers
Consumer
Choice
Prices as a Signal
• Prices send messages
• Prices can act as a signal to both producers
and consumers
• Prices act as a signal that tells producers and
consumers how to adjust.
• Prices tell buyers and sellers whether goods
are in short supply or readily available.
Chapter 6, Section 1
CONNECTION
Prices serve as link between
consumers and producers
Chapter 6, Section 1
A high price
is a signal for
producers to
supply more
Chapter 6, Section 1
A high price
is a signal for
consumers
to buy less
Chapter 6, Section 1
A low price is
a signal for
producers
to offer less
Chapter 6, Section 1
A low price
is a signal
for
consumers
to buy more
Chapter 6, Section 1
Demand
Price
Price
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
$3.00
2.50
2.00
1.50
Quantity
12
10
8
6
4
2
0
1.00
0.50
0 1
Chapter 6, Section 1
2 3 4 5 6 7 8 9 10 11 12
Quantity
Supply
Price
Price
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
$3.00
2.50
2.00
1.50
1.00
Quantity
0
0
1
2
3
4
5
0.50
0
Chapter 6, Section 1
1 2 3 4 5 6 7 8 9 10 11 12
Quantity
The Price System is EFFICIENT
• Producers supply only the goods and services that
meet consumers needs and wants.
• If they can’t sell it…THEY WON’T MAKE IT.
• Efficient resource allocation - No wasted resources goods are produced at the lowest possible price to
make a profit.
• Efficient resource allocation - the factors of
production will be used for their most valuable
purposes.
• Buyers don’t waste resources either – can shop for
best price
Chapter 6, Section 1
Price as an Incentive
• Prices provide a standard of measure of value
throughout the world.
• Buyers and sellers can both participate in
making economic decisions.
Chapter 6, Section 1
The Profit Incentive
• In The Wealth of
Nations, Adam Smith
wrote that businesses
do best when they
provide what people
need.
• Financial rewards
motivate people. How
have you provided or
benefited from the
profit incentive?
Chapter 6, Section 1
Flexibility of Prices
• Prices are flexible, which means they can be
increased to solve problems of shortage and
decreased to solve problems of surplus.
• Raising prices is one of the quickest ways to
solve a shortage. It reduces quantity
demanded and only people who have enough
money will be able to pay the higher prices.
This will cause the market to settle at a new
equilibrium.
• Allows for variety of goods and services
Chapter 6, Section 1
Consumer Choices
• Buyers are free to buy or not to buy
• Sellers produce goods and services that buyers
demand at the price they want
• In a free market economy, prices help
consumers choose among similar products
and allow producers to target their customers
with the products the customers want most.
• In a command economy, production is
restricted to a few varieties of each product.
As a result, there are fewer consumer choices.
Chapter 6, Section 1
COMBINING SUPPLY & DEMAND
DEMAND
Chapter 6, Section 1
SUPPLY
Key Terms
• equilibrium: the point at which the
demand for a product or service is equal
to the supply of that product or service
• disequilibrium: any price or quantity not
at equilibrium
• shortage: when quantity demanded is
more than quantity supplied
• surplus: when quantity supplied is more
than quantity demanded
Chapter 6, Section 1
Introduction
• What factors affect price?
–Prices are affected by the laws of
supply and demand.
–They are also affected by actions of the
government.
• Often the government will intervene
to set a minimum or maximum price
for a good or service.
Chapter 6, Section 1
What is Equilibrium?
Chapter 6, Section 1
SUPPLY & DEMAND TOGETHER
Demand
Supply
Equilibrium the point at which quantity
demanded & quantity supplied are
equal
Chapter 6, Section 1
Equilibrium Price
–The price that balances quantity
supplied and quantity demanded.
–On a schedule, it is the price at
which the quantity demanded &
quantity supplied are the same
Chapter 6, Section 1
Equilibrium Quantity
–The quantity supplied and the
quantity demanded are equal at the
equilibrium price.
–On a graph it is the quantity at
which the supply and demand
curves intersect.
Chapter 6, Section 1
Equilibrium
Demand Schedule
Supply Schedule
At $2.00, the quantity demanded is equal
to the quantity supplied
Chapter 6, Section 1
The Equilibrium of Supply and Demand
Price
Supply
Equilibrium price
Equilibrium
$2.00
Demand
Equilibrium quantity
0
Chapter 6, Section 1
1
2
3
4
5
6
7
8
9
10
11
Quantity
Point at which
the supply
curve crosses
the demand
curve
Chapter 6, Section 1
Equilibrium is the point at
which supply and demand are
equal
Chapter 6, Section 1
Equilibrium
• In order to find the equilibrium price and quantity,
you can use supply and demand schedules.
• When a market is at
equilibrium, both
buyers and sellers
benefit.
How many slices
are sold at
equilibrium?
Chapter 6, Section 1
CHANGES IN EQUILIBRIUM
DEMAND
Chapter 6, Section 1
SUPPLY
Introduction
• How do changes in supply and demand
affect equilibrium?
– Changes in supply and demand cause
prices to go up and down, which disrupts
the equilibrium for a particular good or
service.
– In a free market, price and quantity will
tend to move toward equilibrium
whenever they find themselves in
disequilibrium.
Chapter 6, Section 1
Analyzing Changes
in Equilibrium
Chapter 6, Section 1
Chapter 6, Section 1
YOU MUST ASK:
• Which curve shifts: demand or
supply?
• Which way does the curve shift?
• How does the shift affect equilibrium
price and equilibrium quantity?
Chapter 6, Section 1
DEMAND
Chapter 6, Section 1
Shifts in Demand
• Ceteris paribus-“all other things held constant.”
• When the ceteris paribus assumption is dropped,
movement no longer occurs along the demand
curve. Rather, the entire demand curve shifts.
• A shift means that at the same prices, more people
are willing and able to purchase that good.
This is a change in demand, not a change in quantity
demanded
PRICE DOESN’T SHIFT THE CURVE
Copyright
Chapter 6, Section 1
ACDC Leadership 2015
35
DEMAND CURVE
Chapter 6, Section 1
Chapter 6, Section 1
CHANGE IN DEMAND
Determinants of Demand
• B - Change in Number of Buyers
• R- Change in Price of Related Goods (complements
and substitutes)
• I - Change in the Consumer Income
• T – Change in Consumer Tastes and Preferences
• E- Change in consumers’ price expectations
Chapter 6, Section 1
How an Increase in Demand Affects the
Equilibrium
Price of
Ice-Cream
Cone
1. Hot weather increases
the demand for ice cream...
Supply
$2.50
New equilibrium
2.00
2. ...resulting
in a higher
price...
Initial
equilibrium
D2
D1
0
Chapter 6, Section 1
3. ...and a higher
quantity sold.
7
10
Quantity of
Ice-Cream Cones
How does an increase in demand affect the
equilibrium?
•An increase in
demand increases
the equilibrium
price and the
equilibrium
quantity
Chapter 6, Section 1
Chapter 6, Section 1
YOU MUST ASK:
• Which curve shifts: demand or
supply?
• Which way does the curve shift?
• How does the shift affect equilibrium
price and equilibrium quantity?
Chapter 6, Section 1
SUPPLY
Chapter 6, Section 1
SUPPLY CURVE
Chapter 6, Section 1
What causes the supply curve to shift?
Determinants of Supply
1. Change in the cost of productive resource
costs
2. Change in profit opportunities of producing
other products
3. Change in technology
4. Change in the government tax or subsidy
5. Change in producers’ price expectations
6. Change in number of sellers in the market
Chapter 6, Section 1
Chapter 6, Section 1
CHANGE IN SUPPLY
WHAT FACTORS CAUSE A CHANGE
IN SUPPLY?
1.
2.
3.
4.
5.
6.
7.
Productivity
Regulation
Input Costs (raw materials)
Number of Suppliers
Technology
Taxes and Subsidies
Expectations
Chapter 6, Section 1
Increase in Supply
• A shift in the supply curve will change the
equilibrium price and quantity.
• As supply increases, it will cause the
market to move toward a new
equilibrium price.
• An example of a product that saw a
radical market change in recent years is
the digital camera.
Chapter 6, Section 1
Falling Prices and the Supply Curve
Chapter 6, Section 1
Changes in Supply
• Checkpoint: What
happens to the
equilibrium price when
the supply curve shifts to
the right?
– An increase in supply
shifts the supply curve
to the right.
– This shift throws the
market into
disequilibrium.
– Something will have to
change in order to bring
the market back to
equilibrium.
Chapter 6, Section 1
Decrease in Supply
• Some factors lead to a decrease in supply,
which shifts the supply curve to the left and
results in a higher market price and a decrease
in quantity sold.
• These factors include:
– An increase in the costs of resources to produce a
good
– An increase in labor costs
– An increase in government regulations
Chapter 6, Section 1
How a Decrease in Supply Affects the
Equilibrium
Price of
Ice-Cream
Cone
S2
1. An earthquake reduces
the supply of ice cream...
S1
New
equilibrium
$2.50
2.00
Initial equilibrium
2. ...resulting
in a higher
price...
Demand
0
Chapter 6, Section 1
1 2 3 4
7 8 9 10 11 12 13
3. ...and a lower
quantity sold.
Quantity of
Ice-Cream Cones
How a Decrease in Supply Affects the
Equilibrium
•Equilibrium
price = $2.00
•Equilibrium
quantity = 7
Chapter 6, Section 1
How a Decrease in Supply Affects the
Equilibrium
•An earthquake
reduces the supply of
ice cream
•The supply curve
shifts to the left
Chapter 6, Section 1
How a Decrease in Supply Affects the
Equilibrium
Price of
Ice-Cream
Cone
S2
1. An earthquake reduces
the supply of ice cream...
S1
New
equilibrium
$2.50
2.00
Initial equilibrium
2. ...resulting
in a higher
price...
Demand
0
Chapter 6, Section 1
1 2 3 4
7 8 9 10 11 12 13
3. ...and a lower
quantity sold.
Quantity of
Ice-Cream Cones
How does a decrease in supply affect the
equilibrium?
•A decrease in
supply raises the
equilibrium price
and lowers the
equilibrium quantity
Chapter 6, Section 1
A “Moving Target”
• Equilibrium for most products is in
constant motion.
• Think of equilibrium as a “moving
target” that changes as market
conditions change. As supply or
demand increases or decreases, a new
equilibrium is created for that product.
Chapter 6, Section 1
A Change in Demand: Fads
• Fads often lead to an
increase in demand for
a particular good.
• The sudden increase in
market demand cause
the demand curve to
shift to the right.
• What impact did the
change in demand
shown in the graph
have on the equilibrium
price?
Chapter 6, Section 1
Fads and Shortages
• As a result of fads,
shortages appear to
customers in different
forms:
– Empty shelves at the
stores
– Long lines to buy a
product in short
supply
– Search costs, such as
driving to multiple
stores to find a
product.
Chapter 6, Section 1
Reaching a New Equilibrium
• Checkpoint: How is equilibrium reached after a
shortage?
– Eventually, the increase in demand for a particular
good will push the product to a new equilibrium
price and quantity.
– Once a fad reaches its peak, though, prices will
drop as quickly as they rose:
• A shortage becomes a surplus, causing the
demand curve to shift to the left and restoring
the original price and quantity supplied.
• New technology can also lead to a decrease in
consumer demand for one product as a more
high-tech substitute becomes available.
Chapter 6, Section 1
What is DISEQUILIBRIUM?
Chapter 6, Section 1
Objectives
1. Explain how supply and demand create
equilibrium in the marketplace.
2. Describe what happens to prices when
equilibrium is disturbed.
3. Identify two ways that the government
intervenes in markets to control prices.
4. Analyze the impact of price ceilings and
price floors on a free market.
Chapter 6, Section 1
Key Terms
• equilibrium: the point at which the
demand for a product or service is equal
to the supply of that product or service
• disequilibrium: any price or quantity not
at equilibrium
• shortage: when quantity demanded is
more than quantity supplied
• surplus: when quantity supplied is more
than quantity demanded
Chapter 6, Section 1
Key Terms, cont.
• price ceiling: a maximum price that can
legally be charged for a good or service
• rent control: a price ceiling placed on
apartment rent
• price floor: a minimum price for a good
or service
• minimum wage: a minimum price that
an employer can pay a worker for one
hour of labor
Chapter 6, Section 1
DISEQUILIBRIUM
Describes any price or quantity not at
equilibrium
Chapter 6, Section 1
Disequilibrium
• When a market is in disequilibrium, it experiences
either shortages or surpluses, both of which will
eventually lead the market back toward equilibrium.
– Shortages cause a firm to raise its prices. Higher
prices cause the quantity supplied to rise and the
quantity demanded to fall until the two values are
equal again.
– The same holds true for a surplus, only in reverse:
Surpluses cause a firm to drop its prices. Lower
prices cause the quantity supplied to fall and the
quantity demanded to rise until equilibrium is
restored.
Chapter 6, Section 1
Disequilibrium
– If the market price or quantity supplied is
anywhere but at equilibrium, the market is said
to be at disequilibrium.
– Disequilibrium can produce two possible
outcomes:
• Shortage—A shortage causes prices to rise
as the demand for a good is greater than the
supply of that good.
• Surplus—A surplus causes a drop in prices
as the supply for a good is greater than the
demand for that good.
Chapter 6, Section 1
•Market forces push
towards equilibrium
whenever…
•There is
disequilibrium &
prices are flexible
Chapter 6, Section 1
DISEQUILIBRIUM
EXCESS
DEMAND
Chapter 6, Section 1
EXCESS
SUPPLY
Shortage and Surplus
• Shortage and surplus both lead to a market with
fewer sales than at equilibrium.
– How mush is the shortage when pizza is sold at $2.00 per
slice?
Chapter 6, Section 1
PRICE
FLOOR
GOVERNMENT
INTERVENTION
PRICE
CEILING
Chapter 6, Section 1
PRICE CEILING
A maximum price that can be legally
charged for a good or service
Chapter 6, Section 1
Price Ceiling
• While markets tend toward equilibrium on their
own, sometimes the government intervenes and
sets market prices. Price ceilings are one way the
government controls prices.
• Rent Control
• Sets a price ceiling on apartment rent
• Prevents inflation during housing crises
• Helps the poor cut their housing costs
• Can lead to poorly managed buildings
because landlords cannot afford the
upkeep.
Chapter 6, Section 1
RENT
CONTROLS
Chapter 6, Section 1
A price ceiling placed on rent
PRICE CEILING
Price
Supply
Equilibrium
price
$3
Price
ceiling
2
PRICE
CEILING
0
Chapter 6, Section 1
75
Quantity
supplied
125
Quantity
demanded
Demand
Quantity
RENT CONTROLS CAUSE EXCESS DEMAND
Rental
Price of
Apartment
Supply
…rent control
causes excess
demand
RENT CONTROL
EXCESS
DEMAND
0
Chapter 6, Section 1
Demand
Quantity of
Apartments
Excess Demand
Price
Supply
$2.00
$1.50
Shortage
0
Chapter 6, Section 1
1
2
3
4
5 6
7
8 9 10 11 12 13
Demand
Quantity
Shortage
1. Quantity demanded is greater
than quantity supplied
2. The price is below the equilibrium
price
3. There is excess demand
4. Suppliers will raise the price
Chapter 6, Section 1
If there is a shortage, suppliers
will raise price
Chapter 6, Section 1
The Effects of Rent Control
Chapter 6, Section 1
Price Floors
• A price floor is a minimum
price set by the
government. The minimum
wage is an example of a
price floor.
• Minimum wage affects the
demand and the supply of
workers.
– At what wage is the labor
market at equilibrium?
Chapter 6, Section 1
Price floor
PRICE FLOOR
A minimum
price for a
good or
service
Chapter 6, Section 1
Minimum wage
1. A minimum price
that an employer
can pay a worker
for an hour of
labor
2. A government
imposed price
floor
Chapter 6, Section 1
PRICE FLOOR
Price
Supply
Equilibrium
price
$4
Price
Floor
$3
Demand
0
Chapter 6, Section 1
Q1
Quantity
Minimum Wage causes excess supply
Wage
EXCESS SUPPLY
OF WORKERS
Labor
supply
Minimum
wage
Labor
demand
0
Chapter 6, Section 1
Quantity
demanded
Quantity
supplied
Quantity of
Labor
EXCESS SUPPLY OF LABOR
Chapter 6, Section 1
Excess Supply
Price
Surplus
$3.00
Supply
2.50
2.00
1.50
1.00
Demand
0.50
0
Chapter 6, Section 1
1 2 3 4 5 6 7 8 9 10 11 12
Quantity
Surplus
1. Quantity supplied is greater than
quantity demanded
2. The price is above the equilibrium
price
3. There is excess supply
4. Suppliers will lower the price
Chapter 6, Section 1
If there is a surplus, suppliers will
lower price
Chapter 6, Section 1
Price Supports in Agriculture
• Price supports in agriculture are another
example of a price floor.
• They began during the Great Depression to
create demand for crops.
• Opponents of price supports argue that the
regulations dictate to farmers what they
should produce.
• Supporters say that without government
intervention, farmers would overproduce.
Chapter 6, Section 1