Equilibrium price
Interaction of Demand & Supply
 Demand is the willingness to buy a good or
service and the ability to pay for it
 Supply is the desire and the ability to produce
and sell
 Markets are the place where buyers and sellers come
together

Same place where supply and demand interact
 As buyers and sellers interact the market moves
toward market equilibrium

a situation in which the quantity demanded of a good or
service at a particular price is equal to the quantity supplied at
that price
 Equilibrium price is the price at which the
quantity of a product demanded by consumers and
the quantity supplied by producers are equal
Example
 A sandwich shop near an
office park
 new product at lunchtime—
prepared salads
 On the first day, make 40
salads and offers them at
$10 each

Only sell 10 and dispose the rest
Example cont.
 Next day, lower the price to $4
each and make only 15 salads

Learn 35 costumers want salads at the
new lower price
 Try different combinations until
you realize at $6 per salad you
have market equilibrium
 When you have either too many or
too few salads, your motivated to
change the price
Surplus
Surplus is the result of
quantity supplied being
greater than quantity
demanded
Shortage
Shortage is the result of
quantity demanded being
greater than quantity
supplied
Tickle Me Elmo
 Toys are great examples of surplus and
shortages especially during the holiday
season
 Toys are fads and children's views change
rapidly
 In 1996, Tyco Toys Inc introduced tickle
me Elmo


500,000 for the holiday season
Priced at $30
 Sales started slow



Tyco thought the toy was a bust
Then advertising increased, from popular
television personalities
Making the product the must have toy of the
season
Tickle me Elmo cont.
 Sales increase drastically


Prices rose
Supposedly some were sold as much as
$1500
 Tyco tried to increase supply but the
factory was located in Asia
 Shortage persisted through holiday
season
 By spring the supply doubled



The fad ended
Consumers reluctant to buy, resulting in a
surplus
Lowering the price to $25
Equilibrium Price
 Demand
Supply
Equilibrium Price
Supply
Equilibrium Price
or
 Demand
or
Prices & Profits
SECTION 2
How the Price System Works
 More producers in a market increase supply
 Leads to increased competition
 Lower equilibrium price
 Competitive pricing- occurs when producers sell
products at lower prices to lure customers away from
rival producers, while still making a profit

By entering a market at a lower price, a new supplier
can add to its customer base while it maintains
overall profits by selling more units
Prices Motivate Producers and Consumers
 The laws of supply and demand show
that consumers and producers have
different attitudes toward price
Producers want to sell at high prices
Consumers want the best product for
the lowest price
 For producers the price system
provides…
Both information and motivation
Example Prices and Producers
 Information: prices act as signals to
producers about whether it is a good time to
enter or leave a particular market
 Rising prices and profit expectation
motivates producers to enter a market
 Falling prices and possibility of losses lead
for producers to leave a market
Example Prices and Producers
 A shortage in a market is a signal that consumer
demand is not being met by existing suppliers


Not enough Tickle-me-Elmo’s
Prices are too low relative to quantity of demand
 Producers will look at this to raise prices
 Encourages producers to enter market because higher prices
will lead to increase of profit
 As more producers enter the market, quantity supplied
increases
Example Prices and Producers
 Surplus occurs when prices are too high relative to
consumer demand


Producers can respond by either reducing prices OR by
reducing production
Prices drop it signals a good time for producers to leave the
market
 Sometimes, less efficient producers leave a market
completely, as increased competition and lower
prices drive them out of business
Shortage and Surplus for Producers
 Shortage
Low Supply + High Demand =
Prices
 Surplus
Prices High + Low Consumer = Prices
Demand
OR
Supply
Example Prices and Consumers
 Also act as signals and incentives for consumers
 Surplus will lead to lower prices which means for consumers that
it is a good time to buy
 Producers will provide advertisements like store display to draw
in consumers
 Producers will inform consumers that the low prices won’t last
 High prices generally discourage workers from buying
 Might indicate to switch to a substitute at a lower price
 High prices may indicate short supply OR a high status
Example
 Hollister Co
 They are selling a
lifestyle.
 A way to live and only
have a small amount of
supply to offer people
who can pay for this
lifestyle
 No LOGO video