CHAPTER 6 –
DEMAND, SUPPLY, AND PRICES
SECTION 1 –
SEEKING EQUILIBRIUM: DEMAND AND SUPPLY
• Market Equilibrium – quantity demanded of a good/service at a particular
price are equal
• Equilibrium Price – price at which the quantity demanded and the quantity
supplied are equal
FIGURE 6.1 –
KAREN’S MARKET DEMAND AND SUPPLY SCHEDULE
• Karen wants to offer more salads at
higher prices than at lower prices
because she wants to earn more
profit
1. What is the difference between quantity supplied and quantity demanded when the price
is $10? What is the difference when the price is $2?
2. How does this market demand and supply schedule illustrate the laws of demand and
supply?
FIGURE 6.2 –
MARKET DEMAND AND SUPPLY CURVE
Showing the demand curve and the supply
curve together on one graph, allows you to see
the interaction of demand and supply
graphically
1. What is the quantity supplied at $8? What is the quantity demanded at $8?
2. How do these market demand and supply curves illustrate the concept of equilibrium
price?
REACHING THE EQUILIBRIUM PRICE
•
Surplus – the result of quantity supplied being greater than quantity demanded
•
•
•
When there is a surplus, prices tend to fall until the surplus is sold and equilibrium is reached
Producers might also choose to cut back their production to a quantity that is more in line with
what consumers demand at the higher prices
Shortage – the result of quantity demanded being greater than quantity supplied
•
When there is a shortage, producers raise prices in an attempt to balance quantity supplied
and quantity demanded.
•
Producers may also try to increase quantity supplied to meet the quantities demanded at
lower prices
EQUILIBRIUM PRICE IN REAL LIFE
• Disequilibrium –
occurs when
quantity
demanded and
quantity supplied
are not in balance
• Example –
Holiday Toys,
new phones, new
shoes, etc.
EQUILIBRIUM PRICE & CHANGES IN DEMAND AND SUPPLY
If demand
decreases
If demand
increases
Supply
increase
OR
OR
Equilibrium
price falls
THEN
supply
decreases
THEN
Equilibrium
price rises
SECTION 2 –
PRICES AS SIGNALS AND INCENTIVES
• Competitive Pricing – occurs when producers sell products at lower prices to
lure customers away from rival producers, while still making a profit
• Examples:
•
•
•
Sales
Coupons
Give Aways
CHARACTERISTICS OF THE PRICE SYSTEM
• Is it neutral?
• Both the producer and the consumer make choices that determine the equilibrium price
• Is it market driven?
• Market forces, not government policy, determine prices. In effect the system runs itself.
• Is it flexible?
• When market conditions change, so do prices.
• Is it efficient?
• Resources are allocated efficiently since prices adjust until the maximum number of goods
and services are sold
PRICES MOTIVATE PRODUCERS AND CONSUMERS
• Incentive – encourages people to act in certain ways
• Prices and Producers
• for producers, the price system has two advantages
•
Provides information by acting as signals to producers about whether it is a good time to enter
or leave a particular market
•
Rising prices and the expectation of profits motivate producers to enter a market
• A shortage in a market is a signal that consumer demand is not being met by existing
suppliers and producers see an opportunity to raise prices
• While prices are the signals that are visible in the market, it is the expectation of profits or
the possibility of losses that motivates producers to enter or leave a market
• Prices and Consumers
• Surpluses that lead to lower prices tell consumers that it is a good time to buy a
particular good or service – often sent to consumers through advertising and story
displays
• High prices generally discourage consumers from buying a particular product and may
signal that it is time to buy a substitute at a lower price
SECTION 3 –
INTERVENTION IN THE PRICE SYSTEM
• Price Ceiling – the legal maximum price that sellers may charge for a product
• Price Floor – the legal minimum price that sellers may charge for a product
• Rationing – a government system for allocating goods and services using
criteria other than price
• Black Market – involves illegally buying or selling in violation of price controls
or rationing
• Why is a price ceiling set below equilibrium price rather than above it?
• The intent is to keep the price from rising too high when equilibrium is considered too high
What negative incentives does rent
control pricing give to producers and
consumers?
SETTING PRICE FLOORS
• Sometimes the government needs to intervene in
the price system to increase income to certain
producers
• Example: Farmers – set prices for corn, milk, etc.
• Example: Minimum Wage
•
If minimum wage is set above the equilibrium price for
certain jobs in a market, employers may decide that
paying the higher wages is not profitable. As a result,
they may choose to employ fewer works, and
unemployment will increase.
•
If minimum wage is set below the equilibrium price, then it
will have no effect
RATIONING RESOURCES AND PRODUCTS
• Sometimes in periods of national emergency the
government decides to ration scarce products or
resources
• Generally, a system is set up that uses coupons allowing each
person a certain amount of a particular item
• Government may decree that certain resources will not be
rationed but used to produce other goods – this creates the
black market
• Office of Price Administration – established 1941- ration scare goods
• The hope was that these goods would be distributed to everyone, not just those who could
afford the higher market prices born of shortages
• Allocated resources in ways that favored the war effort rather than the consumer market
• Rationing led consumers to look for substitutes
•
Margarine vs. Butter
• Black Markets – come into existence when rationing is imposed
• Prices are very high