Markets, Equilibrium, & Price

How Do You Know When the Price is Right?

Preview

1. Think of a product you recently purchased.

2. On your handout, record the name of the product and the approximate price you paid. Then answer these questions:

a. What are some reasons you were willing to buy the product at this price?

b. What are some reasons the seller was willing to sell the product at this price?

c. Do you think you paid the “right” price for this product? Why or why not?

What Happens When Demand and Supply Meet?

• In a free market, demand and supply work together to determine price.

• The interaction of demand and supply drives prices to market equilibrium:

Quantity consumers are willing

to buy=

Quantity producers

are willing to sell

Reaching Market EquilibriumOn a graph, equilibrium is found at the point where the demand and supply curves interact

Price Watermelons Demanded

WatermelonsSupplied

$4.00 300 100

4.50 250 150

5.00 200 200

5.50 150 250

6.00 100 300

Graph the Supply & Demand for Watermelons

Reaching Market Equilibrium

Graph the Supply & Demand for Watermelons

6.00

5.50

5.00

4.50

4.00

100 150 200 250 300 350

Price Watermelons Demanded

WatermelonsSupplied

$4.00 300 100

4.50 250 150

5.00 200 200

5.50 150 250

6.00 100 300

0

4.00

4.50

5.00

5.50

6.00

100 150 200 250 300 350

.

.

.

.

.

DEMAND

. SUPPLY

Equilibrium Price

Equi

libriu

m Q

uanti

ty

Pric

e

Quantity of Watermelons

So, What is Market Price?

• Market Price is the price a willing consumer pays to a willing producer for the sale of a good or service.

• Supply and Demand are like a pair of scissors – it is impossible to determine which blade cuts that paper – the two blades operate in unison.

What Happens When the Price Isn’t Right?

• Equilibrium Price = “Right” price

• What happens when producers set a market price that is above or below the equilibrium price?

Disequilibrium

Smoothie Demand & Supply SchedulePrice Quantity

DemandedQuantity Supplied Outcome

$1.50 5,000 1,000

$2.00 4,000 2,000

$2.50 3,000 3,000

$3.00 2,000 4,000

$3.50 1,000 5,000

Graph Your Demand and Supply Curves

Shortage fromExcess demand

Equilibrium

Surplus fromExcess supply

Smoothie Demand and Supply

3.50

3.00

2.50

2.00

1.50

1000 2000 3000 4000 5,000 6,000

Price Quantity Demanded

Quantity Supplied

$1.50 5,000 1,000

$2.00 4,000 2,000

$2.50 3,000 3,000

$3.00 2,000 4,000

$3.50 1,000 5,000

S1

D1

Surplus

Shortage

How Do Shifts in Demand of Supply Affect Markets?

• Does the event affect demand, supply, or both?

A new study is published saying blueberries are good for you

• Does the event shift the demand or supply curve right or left?

The demand curve shifts to the right

• What are the new equilibrium price and quantity and how have they changed as a result of the event?

New equilibrium price is $3.00, new quantity is 4,000

Smoothie Demand and Supply

3.50

3.00

2.50

2.00

1.50

1000 2000 3000 4000 5,000 6,000

Price Quantity Demanded

Quantity Supplied

$1.50 5,000 1,000

$2.00 4,000 2,000

$2.50 3,000 3,000

$3.00 2,000 4,000

$3.50 1,000 5,000

S1

D1

D2

How Do Shifts in Demand of Supply Affect Markets?

• Does the event affect demand, supply, or both?

Blueberry crop damaged by drought

• Does the event shift the demand or supply curve right or left?

Supply curve moves to the left

• What are the new equilibrium price and quantity and how have they changed as a result of the event?

New equilibrium price is $3.00, new quantity is 2,000

Smoothie Demand and Supply

3.50

3.00

2.50

2.00

1.50

1000 2000 3000 4000 5,000 6,000

Price Quantity Demanded

Quantity Supplied

$1.50 5,000 1,000

$2.00 4,000 2,000

$2.50 3,000 3,000

$3.00 2,000 4,000

$3.50 1,000 5,000

S1

D1

S2

How Government Intervention Affects Markets

• Price Ceilings: lead to excess demand– Maximum price consumers are required to pay for

a good or service– Price above the ceiling is illegalEx: Rent Control

Blueberry Market

Breaking News! The U.S. government has just announced a price ceiling on blueberries.

• All blueberries must be bought and sold for $3 or less per box.

• Graph it on your handout• Start with equilibrium P = $6, Q = 5

• Price ceilings cause: ______________shortage

How Government Intervention Affects Markets

• Price Floors: lead to excess supply– Minimum price consumers are required to pay for

a good or service– Pricing a good below the Price Floor is illegalEx: Minimum Wage

Blueberry Market

Breaking News! The U.S. government has just announced a price floor on blueberries.

• All blueberries must be bought and sold for $8 or more per box.

• Graph it on your handout

• Price floors cause ________________surplus

Excess Supply and Demand

• Price Controls lead to surpluses and shortages

• Shortages = Rationing– Controlled distribution of a limited supply of goods

or services

• Shortages = Black Market– Illegal market where goods and services are traded a

quantities higher than those set by law

Homework

• Complete Worksheet• Quiz on Supply & Demand next class!