Download cnanges in market equilibrium

CNANGES IN MARKET
EQUILIBRIUM
Economists say that a market will tend
toward equilibrium. Why?
There are two forces that can push a market
into disequilibrium:
A shift in demand
A shift in supply
CHANGE IN PRICE

A shift of the supply curve will change the
equilibrium price and quantity.

Shift in supply is caused by many factors
technology, taxes, subsidies, price of raw
materials, and labor
SHIFTS IN DEMAND

An increase in market demand will affect
the equilibrium in that market.

Shifts in demand cause problems

Shortages
 Search costs

Excess supply
THE ROLE OF PRICES
Prices are a key element of equilibrium.
Price changes can move markets back
toward equilibrium and solve the problem
of excess demand and excess supply.
 Prices in a free market are a tool to
distribute goods and resources

PRICES IN THE FREE MARKET

Prices serve a vital role in a free market
economy.


Prices help move land, labor, and capital into
the hands of producers.
They help put finished goods into the hands of
consumers.
ADVANTAGES OF PRICES

Prices provide a language for buyers and
sellers. Without them a supplier would
have no consistent and accurate way to
measure demand for a good.

Price as an incentive



Both buyers and sellers look at prices to find
information on a goods demand and supply
Prices are a signal that tell a consumer or producer
how to adjust
Prices communicate to both buyers and sellers
whether a good is in short supply or readily available.
ADVANTAGES OF PRICES CONT.

Prices as Signals




High prices are a signal to producers that a
good is in demand and that they should
produce more
Low prices are a signal to producers that a
good is being overproduced and that they
should use there resources to produce another
good that would make them more profits.
Low prices tell consumers to buy more low
opportunity cost
High prices tell consumers to buy less
ADVANTAGES OF PRICE CONT.

Flexibility



When supply or demand shifts the equilibrium
in that market is changed and quantity
supplied and price need to change to rebalance
the market.
Prices are easily increased or decreased to
solve excess demand or excess supply.
Output levels are not flexible


Supply shock
Rationing
sudden shortage
ADVANTAGES OF PRICES CONT

PRICE SYSTEM IS “FREE”


Distribution of goods in a free market system
based on prices costs nothing to administer
unlike a centrally planned economy.
Free market system pricing distributes goods
through millions of decisions made every day
by producers and consumers.
WIDE CHOICE OF GOODS

A benefit of a market-based economy is
the diversity of goods and services a
consumer can buy.



Prices give producers a way to allow
consumers to choose similar products
Prices provide an easy way for a consumer to
narrow their choices to a certain price range
Prices allow producers to target the audience
they want with the products that will sell the
best to that group.
WIDE CHOICE OF GOODS CONT.

Rationing



Government controls the distribution of goods
Why do it?
Shortages
Black Market


When people do business without regard for
government controls on price of quantity.
It allows consumers to pay more so they can
buy a good when rationing makes a good
otherwise unavailable.
EFFICIENT RESOURCE
ALLOCATION

All of the advantages of a free market system
allows prices to allocate resources efficiently.




The economic resources land, labor, and capital will be
used for their most valuable purposes.
A market system, with its freely changing prices,
ensures that resources go to the uses that consumers
value most.
A price based system also ensures that resources use
will adjust to the changing demands of consumers.
All of these changes take place without any
government control because people who own the
resources look for the largest profit.

How do people who earn the largest profit?
PRICES AND THE PROFIT
INCENTIVE

What would happen if a hot summer was
predicted?





What
What
What
What
would
would
would
would
consumers do?
power companies do?
happen to prices?
producers do?
The rise in prices would have given the
incentive to producers to meet these
needs
THE WEALTH OF NATIONS


Adam Smith explained that producers do not
provide goods because of charity but instead they
provide goods because prices are such that they
will profit by provide those goods.
Market Problems

There are some exceptions to the idea that markets lead
to an efficient allocation of resources.



Imperfect competition it can affect prices and higher prices
affect consumer decisions (few producers not enough
competition higher prices)
Spillover costs (externalities) Producers do not pay these
cost so they will produce more than the equilibrium
quantity. Extra cost past on to consumer
Imperfect information if buyers and sellers do not have
enough information to make informed choices about a
product leads to bad choices.