Download Demand, Supply and Prices Ch 6 6-1 Seeking Equilibrium: Demand

Demand, Supply and Prices Ch 6
6-1 Seeking Equilibrium: Demand and Supply
As buyers and sellers interact, the market moves to Market Equilibrium: a situation in
which the quantity demanded of a good or service at a particular price is equal to the
quantity supplied at that price.
Equilibrium Price: price at which the quantity of a product demanded by consumers and
the quantity supplied producers are equal.
Market Schedules: Chart pg 165
Market Demand and Supply Curve: Graph pg 166
Surplus: quantity supplied being greater than quantity demanded
Shortage: quantity demanded being greater than quantity supplied
Graph pg 167
Disequilibrium: imbalance between quantity demanded and quantity supplied
Demand changes: Factors: income, consumer taste, consumer expectations, market size,
substitutes, and complements. Consumers change the quantity demanded at every price.
This causes a shift in demand curve. Chart pg 169
Equilibrium Price and Changes in Demand and Supply
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If Demand Decreases or supply increases then Equilibrium price falls
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If Demand Increases or Supply decreases then Equilibrium price rises
Supply changes: Factors: input costs, productivity, technology, government action,
producer expectations and number of producers.
Prices as Signals and Incentives 6-2
Competitive Pricing: producers sell goods and services at prices that best balance the
desires of making the highest profit and luring customers away from rival producers.
Characteristics of the Price System
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It is neutral: Prices do not favor either the producer or consumer. Both make
choices that help to determine the equilibrium price. Free interaction between
consumers and producers determines the equilibrium price
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It is market driven: Market forces determine prices. Price system runs itself.
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It is flexible: market conditions change, prices change quickly in response.
Surpluses and shortage motivate producers to change prices to reach equilibrium.
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It is efficient: prices adjust until the max number of goods and services are sold.
Producers choose to use their resources to produce certain goods and services
based on the profit they can make by doing so.
Chart Pg 175
Competitive Price
Producers
Consumers
Lower prices to take
Get lower prices
market share from
competitors; maintain
profitability by selling more
units
Incentive
Rising prices: an incentive
Low prices, incentive to
to enter a market; Falling
buy; high prices, incentive
prices: an incentive to leave
to find substitute
a market
Incentives: a way to encourage people to take a certain action
They encourage both producers and sellers to act in certain ways consistent with their
best interest.
Producers: Price system has 2 Advantages: 1. Provides information & 2. Motivation
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Information: signal to enter or leave a market
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Motivation: prices rise = enter market, prices fall = leave the market
Figure Pg 176
Consumers: Price also acts as signal incentives
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Surpluses leads to lower prices = time to buy (advertising & store displays)
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Producers suggest prices won’t last long = motivation to buy now
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Higher prices = discourages consumers from buying or substitute product
Intervention in the Price System 6-3
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Price Ceiling: establish a price to keep it from going too high. The price ceiling is
set below the equilibrium price to create a shortage. Ie… tickets, rent control
Graph pg 181
- Price Floor: government intervenes to help certain producers increase their income.
They establish minimum price for products or services. This encourages an abundant
supply of goods. Ie… minimum wage
Graph pg 182
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Rationing: system in which Government allocates scarce goods and services using
factors other than price. Ie… world war I & II
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Black market: goods and services are illegally bought and sold in violation of price
controls or rationing. Ie…N. Korea 1946-2002