Transcript Chapter 6: Prices
Chapter 6: Prices
Economics Mr. Robinson
Section 1: Combining Supply & Demand
The supply curve (
S
) is positively sloped--higher prices correspond with large quantities. This positive slope indicates the law of supply. The demand curve (
D
) is negatively sloped- higher prices correspond with smaller quantities. This negative slope indicates the law of demand.
In a market graph, like the one displayed here, the equilibrium price is found at the intersection of the demand curve and the supply curve.
Balancing the Market
Finding Equilibrium Equilibrium Point
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$.50
Equilibrium Price Supply
a
Demand 0 50 100 150 200 250
Slices of pizza per day
300 350
Combined Supply and Demand Schedule Price of a slice of pizza
$ .50
Quantity demanded
300
Quantity supplied
100
Result
Shortage from excess demand $1.00
$1.50
250 200 150 200 Equilibrium $2.00
$2.50
150 100 250 300 Surplus from excess supply $3.00
50 350
Market Disequilibrium
If the market price or quantity supplied is anywhere but at the equilibrium price, the market is in a state called disequilibrium. There are two causes for disequilibrium: Excess Demand Excess demand occurs when quantity demanded is more than quantity supplied.
Excess Supply Excess supply occurs when quantity supplied exceeds quantity demanded.
Balancing the Market
The point at which quantity demanded and quantity supplied come together is known as equilibrium.
Qs>Qd Excess Supply Equilibrium Excess Demand Qs=Qd Qs Interactions between buyers and sellers will always push the market back towards equilibrium. Excess supply = price cuts Demand will…? Excess Demand = price increases Demand will…? In some cases the government steps in to control prices. These interventions appear as price ceilings and price floors. A price ceiling is a maximum price that can be legally charged for a good. Example: rent control A price floor is a minimum price, set by the government, that must be paid for a good or service. Example: minimum wage Section 2: Changes in Market Equilibrium Rule One When an independent variable changes and that variable does not appear on the graph, the curve on the graph will shift. Rule Two When an independent variable does appear on the graph, the curve on the graph will not shift, instead a movement along the existing curve will occur. Change in Quantity Supplied Movement along the supply curve. Caused by a change in the price of the product. Change in Supply A shift in the supply curve, either to the left or right. Caused by a change in a determinant other than the price. Input prices Technology Expectations Price of Ice-Cream Cone $3.00 C S A rise in the price of ice cream cones results in a movement along the supply curve. A 1.00 0 1 5 Quantity of Ice-Cream Cones Price of Ice-Cream Cone Business that makes ice cream cones closes Decrease in Supply S 3 S 1 S 2 Increase in Supply 0 Technology increases production of ice cream cones Quantity of Ice-Cream Cones Change in Quantity Demanded Movement along the demand curve. Caused by a change in the price of the product. Change in Demand A shift in the demand curve, either to the left or right. Caused by a change in a determinant other than the price. Consumer income Prices of related goods Tastes Expectation Price of Cigarettes per Pack $4.00 C A tax that raises the price of cigarettes results in a movement along the demand curve. 2.00 0 12 A 20 D 1 Number of Cigarettes Smoked per Day Price of Ice-Cream Cone $3.00 2.50 2.00 1.50 1.00 Increase in demand An increase in income... 0.50 0 1 2 3 4 5 6 7 8 9 10 11 D 1 12 D 2 Quantity of Ice-Cream Cones Price of Ice-Cream Cone 1. Hot weather increases the demand for ice cream... $2.50 2.00 2. ...resulting in a higher price... 0 3. ...and a higher quantity sold. 7 Supply New equilibrium Initial equilibrium 10 D 2 D 1 Quantity of Ice-Cream Cones Price of Ice-Cream Cone S 2 1. An earthquake reduces the supply of ice cream... S 1 $2.50 2.00 2. ...resulting in a higher price... New equilibrium Initial equilibrium Demand 0 1 2 3 4 7 8 9 10 11 12 13 3. ...and a lower quantity sold. Quantity of Ice-Cream Cones Section 3: The Role of Prices Prices serve a vital role in a free market economy. Prices help move land, labor, and capital into the hands of producers, and finished goods in to the hands of buyers. Prices create efficient resource allocation for producers and a language that both consumers and producers can use. Creates a standard measure of value 1. Prices as an Incentive Prices communicate to both buyers and sellers whether goods or services are scarce or easily available. Prices can encourage or discourage production. 2. Signals Think of prices as a traffic light. A relatively high price is a green light telling producers to make more. A relatively low price is a red light telling producers to make less. 3. Flexibility In many markets, prices are much more flexible than production levels. They can be easily increased or decreased to solve problems of excess supply or excess demand. 4. Price System is "Free" Unlike central planning, a distribution system based on prices costs nothing to administer. Consumers can choose among similar products Prices allow producers to target the audience they want Resource Allocation A market system, with its fully changing prices, ensures that resources go to the uses that consumers value most highly. Market Problems Imperfect competition between firms in a market can affect prices and consumer decisions. Spillover costs, or externalities, are costs of production, such as air and water pollution, that “spill over” onto people who have no control over how much of a good is produced. If buyers and sellers have imperfect information on a product, they may not make the best purchasing or selling decision.Market Disequilibrium
Price Ceiling & Price Floor
Two Simple Rules for Movements vs. Shifts
Change in Quantity Supplied vs. Change in Supply
Change in Quantity Supplied
Change in Supply
Shifts in Supply Curve
Change in Quantity Demanded vs. Change in Demand
Changes in Quantity Demanded
Change in Demand
Shifts in Demand Curve
How an Increase in Demand Affects the Equilibrium
How a Decrease in Supply Affects the Equilibrium
The Role of Prices in a Free Market
Advantages of Prices
A Wide Choice of Goods
Efficient Resource Allocation