Download Chapter 6 - PHS-Econ

Chapter 6
Prices as Signals
Reaching Equilibrium

The point where supply and demand
come together is called the equilibrium

It is the point of balance at which
quantity demanded equals quantity
supplied
Equiliibrium
Benefits of Equilibrium

Buyers will purchase exactly as much of
a good as firms are willing to sell

Both buyers and sellers benefit
Disequilibrium

Occurs when quantity supplied is not
equal to quantity demanded in a merket

Disequilibrium can produce two
outcomes, shortage surplus
Shortage
Shortage

Excess demand

Exists when the quantity demanded in a
market is more than the quantity
supplied

How do you eliminate a shortage?
Increase Price

Suppliers will keep raising the price in
order to reach equilibrium

When the price has risen enough to
close the gap, suppliers will have found
the highest price that the market will
bear
Surplus
Surplus

Exists when quantity supplied exceeds
quantity demanded

Indicates that the price is too high

Must lower the price to reach
equilibrium
Price Ceiling

Markets trend toward equilibrium, but in
some cases the government intervenes
to control prices

Maximum price that can be legally
charged for a good or service
Where to Set Price?

The price ceiling is set below the
equilibrium price

An example of price ceilings in our
economy are rent controls
Apartments in NYC
Rent Controls

Price ceiling placed on apartment rents,
to prevent inflation during a housing
crisis

Helps people live in a neighborhood that
they could otherwise not afford
Examine This Curve
Page 138

Turn to Page 136 to see this clearly…
Negative Aspects of Rent Control

How do you determine who gets the
apartments?

Long waiting lists, discrimination, lottery
systems, and bribery

Sometimes only way to get one is to
inherit it
Many are Unkept
Since landlord profits are cut, it shows
in the upkeep
 Why would they update the painting and
fix minor maintenance issues?
 No incentive, long list of people who
would want these apartments

Ending Rent Controls?

Landlords would make more money

Those living in rent controlled
apartments would no longer be able to
afford them

Economists do not like them
Price Floor

Minimum price that must be paid for a
good or service

Best example of this is the minimum
wage
Minimum Wage

A full time worker being paid minimum
wage will earn less than the federal
government says is necessary to
support a couple with one child
Curve
Effects of Price Floors

Page 139

In this example, the minimum wage
creates a surplus of labor
The Role of Prices

Chapter 6: Section 3
Price
Monetary value of a product as
established by supply and demand
 A signal that helps us make our
economic decisions

4 Advantages of Prices

Neutral

Flexible

No administration cost

Familiar
Neutral

Favor neither the producer or the
consumer

Due to prices being a result of
competition between buyers and sellers

A compromises the both parties agree
to
Flexible

Unforeseen disasters and war affect
prices of many items

The price system can absorb these
“shocks”

Allows market to accommodate change
No Administration Cost

Markets find their own price without
outside help or interference

Will explain this in more detail later
Familiar

Have known about prices our entire
lives

Allows us to make decisions quickly and
efficiently

Easily understood
Alternatives to Price System?

Let’s take a look at rationing and see if it
would be a viable alternative
Rationing

System under which an agency such as
government decides everyone’s “fair
share”

Citizens receive a ration ticket or
coupon for goods and services
Ration Ticket

Entitles you to a certain amount of a
product
Problems with Rationing
4 Problems
Fairness
 High Administration Cost
 Diminishing Incentive
 Black Markets

Problem of Fairness

Almost everyone feels that their share is
too small

Almost had gas tickets in the 1970’s,
but couldn’t decide how to ration them
High Administration Cost
Someone has to pay for the coupons
and salaries of the people who
distribute them
 Always have risk of them being stolen
or counterfeited

Diminishing Incentive

Has a negative incentive on people’s
desire to work and produce

Working harder does not equal more
ration coupons…so why do it?
Black Markets

Market in which goods are sold illegally,
without regard for government controls
on price or quantity

Allows consumers to pay more so they
can buy a product when rationing
makes it otherwise unavailable