Equilibrium Price

The magical price where the quantity demanded is equal to the quantity supplied.

Price Quantity

$0.50 30

$1.00 25

$1.50 19

$2.00 15

$2.50 10

$3.00 5

Demand for Milk ( millions of gallon per week)

Price Quantity

$0.50 4

$1.00 12

$1.50 19

$2.00 25

$2.50 27

$3.00 30

Supply for Milk ( millions of gallons per week)

Demand and Supply

Price effect of demand•As price increases the quantity demanded increasesPrice effect of Supply•As price increases the quantity offered for supply decreases.

The Magical Price

Everyone Wins

<Suppliers sell all they want to sell <Demanders buy all they want to buy.

What if the price is lower than the equilibrium?

Shortage•Buyers want to buy more than sellers want to sell.

A Market Left Alone Seeks Equilibrium

What?

In a shortage:Buyers will compete for the scarce items, driving the price up.

•If I can’t get a gallon of milk for $0.50 I'll pay $1.00 to get the amount I want.

Sellers offer more as the price moves upward. •I can sell more gallons of milk at $1.00 than I can at $0.50

Why Would We Have Shortages?

Rent control & price ceilings

Government control of housing prices.•Student housing in the Boston area•Housing in NY City

The market seeks equilibrium in other ways ( other ways to compete for scarce resources)

•NY City Key deposits•Quality of housing - lack of incentive to build and improve.

WWII Food Price CeilingGov’t set price for food - demand greater than

supply

Non market competition (the way around it)•Buy direct from farmer at legal set price. Buy farmers dog for extra price.•Let dog go because of no dog food.•Dog returns to farmer.

1970's Gas Shortages

•1972 oil embargo drove world gas prices up•The U.S. government keeps prices below the Market Clearing Price in form of price ceilings•Buyers want more than seller want to sell.•Non market competition develops in the form of lines ( opportunity cost)

What if the price is above equilibrium?

SurplusThe demander buys less then the supplier wants to

sell.

A Market Left Alone will Seek Equilibrium

In a Surplus

A. The sellers compete for the scarce sells driving the price down.B. As the price decreases the # of buyers increases.C. the process continues until equilibrium is reached

Why would we have a surplus?Government subsides & price floors

US Minimum Wage•Require employers to pay workers over the market clearing price•More supply of worker than demand = poor quality•Less jobs•Less training•competition for the job in non market ways

Changes in Supply and demand

An Increase in the Demand & other things ( supply) being equal

An increase in price & an increase in quantity demanded

Changes in Supply and demand

An increase in Supply & other things ( demand) being equal

<A decrease in price and An increase in quantity

Changes in Supply and Demand

PA decrease in Demand & other things ( supply) being equal<A decrease in price & a decrease in quantity demandedPAn Decrease in Supply<An increase in price a decrease in quantity

Changes in Supply and demandOther possibilities

PDecrease in supply increase in demandPIncrease in Supply decrease in demandPDecrease in supply decrease in demandPIncrease in supply increase in demand

Supply and demand in the US agriculture market

What is the problem?

PUS farm policy<Policy to control the supplyBLand bank programs<Tax incentives to help farmers<Why not market price?

The functions of markets and prices in the free enterprise system.

PInform<Do they value what I have?PIncentive <Produce low & sell high<Buy lowPRationing Function<Who gets what stuff?<What will be produced?<How will it be produced?

The price system and the five fundamental questions

How does the price system:

<1. Determine what is to be produced<2. Organize Production<3. Distribute total output<4. Accommodate change<5. Communicate and coordinate individuals free choices

What to produceProfits, profits, profits

PEconomic Profit -businesses must secure all four type of economic resources<Land, labor, capital, entrepreneurial ability<Payments must be made to secure the resources. Receipt of sales is greater then the costs for resources = Economic ProfitPDollar Votes - consumers vote for type and quantities of produced by demand.

Organizing Production

PHow should resources be allocated among specific industries?PWhat specific firms do the producing in each industry?PWhat combination of resource- what technology- should each firm employ.<Consumer demand, low production costs = profits

Accommodate ChangeThe price system communicates changes to firms:

PChange in consumer demandsPChange in availability of resourcesPChanges in technology or production methods<The firm must adapt to changes to remain competitive.

A The Invisible Hand@The organizing mechanism of competition.

PProduce what is in demand and get it to the consumer at the lowest possible pricePNew firms push better quality and production methodsPNew products developed to satisfy consumer demandsPNew entrepreneurs compete for the consumer dollar and a profit.

Questions to discussP1. What is equilibrium?P2. What is a shortage? P3. What is a surplus?P4. What is a price ceiling? Give an example. P5. What is a price floor? Give an exampleP6. Do you support price floors and ceilings? ExplainP7. Should we do about the US agriculture problem?P8. What are the functions of markets and prices in the free enterprise system?