Chapter 6 Prices: Combining Supply and Demand Combining Supply and Demand Buyers and sellers have to...
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Chapter 6Prices: Combining Supply and Demand
Combining Supply and DemandBuyers and sellers have to meet at a certain pointThis point is called equilibriumEquilibrium price at which Qs = QdMarket Clearing PriceAt this point, the market for a good is stable
How do we find equilibrium?There will be a nice point on the X on the graph!
How do we find equilibrium?
DisequilibriumDisequilibrium when quantity supplied does not equal quantity demandedExcess Demand (Shortage) quantity demanded is more than quantity supplied (prices beneath equilibrium price)
Excess DemandIf you were selling delicious Sweet Onion Chicken Teriyaki sandwiches for $2.00 a piece
Excess DemandYou may have 500 people lined up outside of your Subway to buy them!
Excess DemandHowever, you can only make 250 during the day What do you do?
Excess DemandRemember its okay to raise your prices to a point that you lose 250 customers, because thats all you can feed anyway!
Excess DemandThe point at which you are only making enough sandwiches to feed the customers who want them is equilibrium
Excess SupplyExcess Supply (Surplus) Quantity supplied is more than quantity demanded (prices above the equilibrium price)
Excess SupplyThis would be if you were producing 250 sandwiches a day, but only had 150 people coming in.You would reduce your prices to meet the demand (otherwise, its a huge waste of resources!)
Any Typical High School Boy Questions?This is stupid. Why do we have to learn this?
Think Back to Adam SmithAdam Smith said that the invisible hand let men be free and still do whats best for all menMarket equilibrium is the invisible hand!Companies only produce what society needs because that is best for their profits!
With Ashlee Simpson
Government InterventionIn the American mixed economy, government still takes actions to protect consumers from businesses
Examples of InterventionsPrice Ceilings a maximum that can be legally charged for a goodRent Control a type of price ceiling where the government sets a maximum legal rate for rent
Problems with Price CeilingsWhen you set the price lower than the market allows:Quantity supplied goes down, as businesses dont want to lose moneyQuantity demanded goes up, as consumers want to take advantage of low pricesThis all creates
Examples of InterventionsPrice Floors a minimum price set by the government that must be paid for a good or serviceMinimum Wage a type of price floor where a business must pay a worker at least a certain amount for an hour of labor
Problems with Price FloorsIf the government sets a price floor above market equilibrium, people stop consuming that product (or service)So if the government sets minimum wage too high, for example, you get
And Now for Something Completely Different
2 Minute SketchesI am putting you into groups of 62 of you will be the consumers, 2 of you will be the producers, and 2 of you will be the governmentYou will write a 2 minute script illustrating the concept I assign youEveryone must have a line!
The Role of Prices
The Price SystemThe U.S. and other free markets operate under the price systemThe price system uses a monetary figure to display the value of a good, letting consumers choose which goods to spend their money on
AdvantagesPrice is an incentive it tells consumers and producers how to adjust their patternsPrice is a signal it tells people whether the market for a good is profitable or not
AdvantagesThe Price System is Flexible prices change with supply and demandThe Price System is Free the price system does not require large government agencies to oversee the distribution of goods
Problems with Other SystemsRationing the government sets limits on how much of a product you are allowed to consumeRationing causes shortages since the government often does not set reasonable limits
Problems with Other SystemsThe Black Market the market where goods are sold illegallyBlack Markets encourage higher prices, and also defeat the purpose of a command economy
Typical High School Boy Questions?This is stupid. I hate economics. It doesnt matter.
Heres Why it MattersThe Price System allows resources to be allocated (given out) efficientlyAll resources are placed where they are most valuable to consumersAll without the intrusion of the government in your life!
Adam Smith, Man of Astounding Genius and Economic Brilliance for His Time, and for Ours as well.Answer this question: why do butchers and bakers provide people with food?
Adam Smith, Man of Astounding Genius and Economic Brilliance for His Time, and for Ours as well.Because they will make a profit!
Adam Smith, Man of Astounding Genius and Economic Brilliance for His Time, and for Ours as well.This is the theory in Smiths book, The Wealth of Nations
Possible DisadvantagesImperfect Competition if only a few firms sell a product, there is not enough competition to keep prices lowSpillover Costs costs that affect people with no control over the production of a good (such as pollution)