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Markets & Prices What If The Price Is Too High sellers have incentive to produce a lot buyers have incentive to consume a little excess supply (surplus) competition among sellers: P ↓ weeds out extra sellers, attracts additional buyers Excess Supply Price of Ice-Cream Cone Supply Surplus $2.50 2.00 Demand 4 Quantity demanded 7 10 Quantity supplied Quantity of Ice-Cream Cones Markets & Prices What If The Price Is Too Low buyers have incentive to consume a lot sellers have incentive to produce a little excess demand (shortage) competition among buyers: P ↑ weeds out extra buyers, attracts additional sellers Excess Demand Price of Ice-Cream Cone Supply $2.00 1.50 Shortage Demand 4 Quantity supplied 7 10 Quantity demanded Quantity of Ice-Cream Cones Gains From Trade Opportunity For Improvement should a particular unit of a good be produced and consumed? only if market participants can benefit from exchange as long as someone is willing to pay more than it would cost a firm to produce the unit, then there are incentives to enter into the transaction Gains From trade Price Supply Value to buyers Cost to sellers Cost to sellers Value to buyers Equilibrium quantity Value to buyers is greater than cost to sellers. Value to buyers is less than cost to sellers. Demand Quantity Markets & Competition Competition Regulates Markets buyers and sellers both gain from exchange prices adjust to encourage trade competition directs goods & services (resources) to their most highly-valued uses FTE Shocks What If Market Conditions Change suppose something other than the price of a good changes – price of inputs, technology – income, price of other goods, tastes & preferences a change in market conditions will create a disequilibrium the price adjusts to bring the quantity supplied and the quantity demanded into balance Shocks Three Steps does the event shift the supply curve or demand curve to the left or to the right use the S & D diagram to see how the shift affects the equilibrium price and quantity Increase In Demand Price of Ice-Cream Cone 1. Hot weather increases the demand for ice cream . . . Supply New equilibrium $2.50 2.00 2. . . . resulting in a higher price . . . Initial equilibrium D D 7 3. . . . and a higher quantity sold. 10 Quantity of Ice-Cream Cones Increase In Demand Hot Weather increased tastes & preferences demand curve shifts to the right shortage at initial equilibrium price P ↑ to restore equilibrium new equilibrium: higher P higher Q Factors That Shift Demand Factors That Shift Demand Recall….. if more people want a particular product D ↑ leads to P↑ sends signal to producers that more is desired sellers respond to incentive of higher prices ethanol and corn bellbottoms are all the rage this year cowbells? Decrease In Supply Price of Ice-Cream Cone S2 1. An increase in the price of sugar reduces the supply of ice cream. . . S1 New equilibrium $2.50 Initial equilibrium 2.00 2. . . . resulting in a higher price of ice cream . . . Demand 4 7 3. . . . and a lower quantity sold. Quantity of Ice-Cream Cones Decrease In Supply Price Of Sugar Rises increased price of input supply curve shifts to the left shortage at initial equilibrium price P ↑ to restore equilibrium new equilibrium: higher P lower Q Factors That Shift Supply Shocks What Happens to Price and Quantity When Supply or Demand Shifts? Efficiency The Invisible Hand guides decision-making rewards efficient producers and consumers goods society wants prices society is willing and able to pay Equilibrium Price of Ice-Cream Cone Supply Equilibrium Equilibrium price $2.00 Equilibrium quantity 1 2 3 4 5 6 7 8 Demand 9 10 11 12 13 Quantity of Ice-Cream Cones University Wisconsin-Eau Claire 1 Markets inofAction: Application Two Sources Of Seasonal Variation beachfront cottages apples identify period of highest consumption will price be high or low? University Wisconsin-Eau Claire 1 Markets inofAction: Application Two Sources of Seasonal Variation University Wisconsin-Eau Claire 2 Markets inofAction: Application Corn and Beef D for corn (ethanol) has led to P corn is main feed for cattle (used to produce beef) What happens in the market for beef? Atkin’s Diet has people wanting more beef….. Mad Cow scare in Nebraska meat plant….. University Wisconsin-Eau Claire Markets inofAction: Application 3 Nursing Shortage nursing is traditionally a women’s occupation new higher paying job opportunities for women What happens in the market for nurses? an aging population has led to D for medical services… apply similar analysis to teachers, truck drivers… University Wisconsin-Eau Claire Markets inofAction: Application 4 Taxes, Markets & Government Revenue $1 tax on each unit sold in the marketplace How successful will this be in gasoline market? How successful will this be in the cigarette market? now consider the market for footwear… – black Converse Chuck Taylor high-tops… University of Wisconsin-Eau Claire Markets in Action: Other Questions Why do houses ↑ in price after purchase, while automobiles ↓ in price after purchase? How do consumers respond to price changes? – salt, public transportation, gasoline (what’s up with gas prices) If there are more cranberries, how come the price is higher? Why is there currently a shortage of nurses and truck drivers