Download Chapter 6: Prices

Chapter 6:
Prices
Economics
Mr. Robinson
Section 1:
Combining Supply & Demand
The supply curve (S) is
positively sloped--higher
prices correspond with
large quantities. This
positive slope indicates
the law of supply.
The demand curve (D)
is negatively sloped-higher prices
correspond with
smaller quantities.
This negative slope
indicates the law of
demand.
In a market graph, like
the one displayed
here, the equilibrium
price is found at the
intersection of the
demand curve and the
supply curve.
Balancing the Market
Finding Equilibrium
Equilibrium Point
Combined Supply and Demand Schedule
$3.50
$2.50
$2.00
Equilibrium
Price
$1.50
$1.00
$.50
Supply
0
50
a
Equilibrium
Quantity
Price per slice
$3.00
Demand
100 150 200 250 300
Slices of pizza per day
Price of
a slice
of pizza
Quantity
demanded
Quantity
supplied
$ .50
300
100
$1.00
250
150
$1.50
200
200
$2.00
150
250
$2.50
100
300
$3.00
50
350
350
Result
Shortage from
excess demand
Equilibrium
Surplus from
excess supply
Market Disequilibrium
 If the market price or quantity supplied is
anywhere but at the equilibrium price, the
market is in a state called disequilibrium.
 There are two causes for disequilibrium:

Excess Demand


Excess demand occurs when quantity demanded
is more than quantity supplied.
Excess Supply

Excess supply occurs when quantity supplied
exceeds quantity demanded.
Balancing the Market
 The point at which quantity demanded and
quantity supplied come together is known as
equilibrium.
Qs>Qd
Excess Supply
Equilibrium
Qs=Qd
Excess Demand
Qs<Qd
Market Disequilibrium
 Interactions between buyers and sellers will
always push the market back towards
equilibrium.

Excess supply = price cuts


Demand will…?
Excess Demand = price increases

Demand will…?
Price Ceiling & Price Floor
 In some cases the government steps in to
control prices.
 These interventions appear as price ceilings
and price floors.
 A price ceiling is a maximum price that can be
legally charged for a good.

Example: rent control
 A price floor is a minimum price, set by the
government, that must be paid for a good or
service.

Example: minimum wage
Section 2:
Changes in Market Equilibrium
Two Simple Rules for Movements
vs. Shifts
 Rule One
 When an independent variable changes
and that variable does not appear on the
graph, the curve on the graph will shift.
 Rule Two
 When an independent variable does
appear on the graph, the curve on the
graph will not shift, instead a movement
along the existing curve will occur.
Change in Quantity Supplied vs.
Change in Supply
Change in Quantity
Supplied
 Movement along the
supply curve.
 Caused by a change in
the price of the product.
Change in Supply
 A shift in the supply
curve, either to the left
or right.
 Caused by a change in
a determinant other
than the price.



Input prices
Technology
Expectations
Change in Quantity Supplied
Price of
Ice-Cream
Cone
S
C
$3.00
A rise in the price
of ice cream cones
results in a
movement along
the supply curve.
A
1.00
0
1
5
Quantity of
Ice-Cream
Cones
Change in Supply
Price of
Ice-Cream
Cone
Business that makes ice
cream cones closes
S3
S1
S2
Decrease in
Supply
Increase in
Supply
Technology increases
production of ice
cream cones
0
Quantity of
Ice-Cream
Cones
Shifts in Supply Curve
Change in Quantity Demanded vs.
Change in Demand
Change in Quantity
Demanded
 Movement along the
demand curve.
 Caused by a change in
the price of the product.
Change in Demand
 A shift in the demand
curve, either to the left
or right.
 Caused by a change in
a determinant other
than the price.




Consumer income
Prices of related goods
Tastes
Expectation
Changes in Quantity Demanded
Price of
Cigarettes
per Pack
$4.00
A tax that raises the
price of cigarettes
results in a movement
along the demand
curve.
C
A
2.00
D1
0
12
20
Number of Cigarettes
Smoked per Day
Change in Demand
Price of
Ice-Cream
Cone
$3.00
An increase
in income...
2.50
Increase
in demand
2.00
1.50
1.00
0.50
D1
0 1
2 3 4 5 6 7 8 9 10 11 12
D2
Quantity of
Ice-Cream
Cones
Shifts in Demand Curve
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
3. ...and a higher
quantity sold.
7
10
Quantity of
Ice-Cream Cones
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
1 2 3 4
7 8 9 10 11 12 13
3. ...and a lower
quantity sold.
Quantity of
Ice-Cream Cones
Section 3:
The Role of Prices
The Role of Prices in a Free Market
 Prices serve a vital role in a free market
economy.
 Prices help move land, labor, and capital into
the hands of producers, and finished goods in
to the hands of buyers.
 Prices create efficient resource allocation for
producers and a language that both
consumers and producers can use.

Creates a standard measure of value
Advantages of Prices
1. Prices as an Incentive
Prices communicate to both buyers and sellers whether goods
or services are scarce or easily available. Prices can
encourage or discourage production.
2. Signals
Think of prices as a traffic light. A relatively high price is a
green light telling producers to make more. A relatively low
price is a red light telling producers to make less.
3. Flexibility
In many markets, prices are much more flexible than
production levels. They can be easily increased or decreased
to solve problems of excess supply or excess demand.
4. Price System is "Free"
Unlike central planning, a distribution system based on prices
costs nothing to administer.
A Wide Choice of Goods
 Consumers can choose among similar
products
 Prices allow producers to target the audience
they want
Efficient Resource Allocation
 Resource Allocation
 A market system, with its fully changing prices, ensures
that resources go to the uses that consumers value most
highly.
 Market Problems
 Imperfect competition between firms in a market can affect
prices and consumer decisions.
 Spillover costs, or externalities, are costs of production,
such as air and water pollution, that “spill over” onto people
who have no control over how much of a good is produced.
 If buyers and sellers have imperfect information on a
product, they may not make the best purchasing or selling
decision.