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 Equilibrium
On a graph, equilibrium is found at the point
where the demand and supply curves interact
Price
Watermelons
Demanded
Watermelons
Supplied
$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
6.00
5.50
5.00
Price
Watermelons
Demanded
Watermelons
Supplied
$4.00
300
100
4.50
250
150
5.00
200
200
5.50
150
250
6.00
100
300
4.50
4.00
100
150
200
250
300
350
Graph the Supply & Demand for Watermelons
6.00
.
.
.
5.50
Equilibrium Price
.
Equilibrium Quantity
Price
5.00
4.50
4.00
0
SUPPLY
100
150
200
Quantity of Watermelons
.
.
DEMAND
250
300
350
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 Schedule
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
Outcome
Shortage from
Excess demand
Equilibrium
Surplus from
Excess supply
Graph Your Demand and Supply Curves
Smoothie Demand and Supply
Surplus
Price
Quantity
Demanded
Quantity
Supplied
$1.50
5,000
1,000
$2.00
4,000
2,000
$2.50
3,000
3,000
2.00
$3.00
2,000
4,000
1.50
$3.50
1,000
5,000
3.50
S1
3.00
2.50
D1
1000
2000
3000
4000
Shortage
5,000
6,000
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
S1
3.50
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
3.00
2.50
D2
2.00
D1
1.50
1000
2000
3000
4000
5,000
6,000
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
S2
3.50
S1
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
3.00
2.50
2.00
D1
1.50
1000
2000
3000
4000
5,000
6,000
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 illegal
Ex: 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
shortage
• Price ceilings cause: ______________
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 illegal
Ex: 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
surplus
• Price floors cause ________________
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!