Download UNIT 2: Chapter 6: PRICES: Section 1: Combining Supply and

UNIT 2: Chapter 6: PRICES: Section 1: Combining Supply and Demand
Learn how markets operate and how markets can tum competing interests into a positive outcome
for both sides. Free
Markets produce some of their best outcome when left alone without government intervention
Balancing the Market
Demand schedule shows how much the consumers are willing to buy at various prices.
Supply schedule shows how much sellers are willing to sell at various prices
Defining Equilibrium---point where demand and supply come together at the same number of
products where the price at which the quantity supplied equals the quantity demanded.
Equilibrium price buyers will purchase the goods the equilibrium price will find ample supplies
on store shelves
Graphing Equilibrium---the market supply curve and the market demand curve are plotted on
same graph. Equilibrium price and quantity can be found where quantity supplied equals quantity
demanded, or the point where the supply curve crosses the demand curve.
Disequilibrium---if the market price or quantity supplied is anywhere but at the equilibrium. It
occurs when quantity supplied is not equal to quantity demanded in a market.
Excess Demand---occurs when quantity demanded is more than quantity supplied. When it is
below equilibrium have excess demand. As price rises people will' buy less of that product.
Excess demand the quantity demanded exceeds the quantity supplied, supplies will keep raising
the price.
Excess Supply---occurs when quantity supplied exceeds quantity demanded. When price falls
quantity demanded will rise, when price rises quantity demanded will fall. Whenever the market
is in disequilibrium and prices are Flexible, market forces will push the market toward the
equilibrium. When there is excess demand, profit - seeking sellers realize that they can raise
prices to earn more profits. In this way, market prices move toward the equilibrium level
Government Intervention---Price ceiling or maximum price that can legally charged for a good
that is considered essential Rent Control prevent inflation during a housing crisis, others
motivated to help poor households by cutting their housing costs and permitting them to live in
neighborhoods they could not otherwise afford. Cost of price ceilings---few renters benefit from
rent control---long waiting lists, discrimination by landlords, and even bribery, are used to
allocate the scarce supply of apartments among the many peoole who want them. Landlords
increase profits by cutting costs.
Ending Rent Control---markets would rise to the equilibrium of the supply and demand for the
apartments and instead of renters spending time and money looking for apartments they would
then be able to find a wider selection of apartments. Landlords would also have a greater
incentive to maintain apartments. People who lived in an area that had been under rent control
would no longer be able to afford to live in that neighborhood and would be forced to move to a
cheaper area.
Price Floors---Price floor minimum price for a good or service
Minimum Wage---minimum price that an employer can pay a worker for an hour of labor. If
minimum wage is set above the market equilibrium wage rate, the result is a decrease in
employment. If minimum wage is below equilibrium wage, it will have now effect.
Price Supports in Agriculture Northeast Dairy Compact---guarantee a minimum price for milk
produced on farms in these states.
Section 2: Changes in Market Equilibrium
Market tends to move toward equilibrium. The price and quantity will gradually move toward
their equilibrium levels. WHY?
Excess demand will lead firms to raise prices. Higher prices induce the quantity supplied to rise
and the quantity demanded to fall until the two values are equal. Excess Supply will force firms to
cut prices, cause quantity demanded to rise and the quantity supplied to fall until, once again, they
are equal 2 factors that can push it into disequilibrium:
(1) Shift in the entire demand curve
(2) Shift in entire supply curve
Changes in Price---factors that shift the supply curve to the left or to the right: advances in
technology, new government taxes and subsidies, and changes in the prices of raw material and
labor us to produce the goods. Shift of the entire supply curve to left or right creates new
equilibrium. Understanding shift in supply when technology makes a good more accessible the
demand increases.
Finding a New Equilibrium---new technology makes a good less expensive demand increases
sending supply curve to the market equilibrium follows the intersection of the demand curve and
the supply curve as that point moves downward along the demand curve. Moving target that
changes as market conditions change.
Fall in Supply---factors that reduce supply can shift the supply curve to left. Rise in cost of
raw materials, cost of labor, government imposes new tax will all affect the supply curve and
move it to the left. As supply curve shifts to the left, suppliers raise their prices and the
quantity demanded falls. New equilibrium point along demand curve above and to the left of
the original equilibrium point. Market price higher and quantity sold lower.
Shift in Demand---fads reflect impact of consumer tastes and advertising on consumer
behavior
Problem of Excess Demand---a fad appears as a gap between quantity supplied and new
quantity demanded creating excess demand or a shortage.
Search Cost-financial and opportunity costs consumers pay in searching for a good or
service.
Return to Equilibrium---When demand increases both the equilibrium price and equilibrium
quantity also increases. Demand curve shifted and equilibrium point has moved setting in
motion market forces that push the price and quantity toward new equilibrium values.
Fall in Demand create excess supply or a surplus.
Section 3: The Role of Prices free market, prices are tool for distributing goods and resources
throughout the economy.
Prices in the Free Market prices help move land, labor land capital into the hands of
producers and finished goods into the hands of buyers.
Advantages of Prices---provides a language for buyers and sellers. Prices give a standard
measure of value for a good and a consistent and accurate way to measure demand for a
product.
Prices as an Incentive---Prices communicate to both buyers and whether goods are in short
supply or readily avialable.
Prices as Signals---High price green light that tells producers that a specific good is in
demand and that they should use their resources to produce more. Low price is a red light to
producers that a good is being overproduced. Low prices tell a supplier that the use of
existing resources to produce a different good.
Flexibility---Supply Shock is a sudden shortage of a good EX: Gasoline or wheat. Excess
demand that suppliers can no longer meet. Rationing or dividing up goods and services using
criteria other than price, is expensive and can take a long time to organize.
Price System is "Free"--- Free market pricing distributes goods through millions of
decisions made daily by consumers and suppliers.
A wide choice of goods---benefits of market-based economy is the diversity of goods and
services consumers can buy.
Prices also allow producers to target the audience they want with the products that will sell
best to that audience. In a command economy hope to distribute wealth evenly throughout
their society as a result, goods were low in price but hard to find.
Rationing and Shortages---Soviet Union goods inexpensive but consumers could not always
find them.
Black Market---allow consumers to pay more so they can buy a good when rationing makes
it otherwise unavailable.
Efficient Resource Allocation---means that economic resources-land, labor, and capital- will
be used for their most valuable purposes. How do people earn the larges returns? By selling
to the highest bidder.
Prices and the Profit Incentive---The Wealth of Nations by Adam Smith "The Wealth of
Nations " published in 1776. Basically, producers (businesses) will find out what is wanted
and then will provide for it.
Market Problems
(1) Imperfect competition affect prices and higher prices can affect consumer decisions
(2) Spillover costs or externalities that include costs of production such as air and water
pollution.
(3) Imperfect information can prevent a market from operating smoothly. Buyers and sellers
do not have enough information to make informed choices about a product, they may not
make the choice that is best for them