Chapter 6 Demand, Supply, and Prices

Section 1

•Seeking Equilibrium: Demand and Supply

The Interaction of Demand and Supply

As buyers and sellers interact the market moves towards a market equilibrium Where the quantity supplied at a certain price matches the

quantity demanded at that price

This can produce an equilibrium price where the price is equal between the quantity supplied and quantity demanded.

Market Demand and Supply Schedule

Market Demand and Supply Curve

Reaching the Equilibrium Price

In order to reach an equilibrium price markets generally go through a surplus (quantity supplied greater than quantity demanded) or a shortage (quantity supplied lesser than the quantity demanded)

Through trial and error equilibrium is finally reached

Surplus is measured by a horizontal ABOVE the equilibrium.

When there is a surplus prices tend to drop until the surplus is sold

Reaching the Equilibrium Price

A shortage is measured by a horizontal line BELOW the equilibrium price

A shortage is when not enough products are produced

When a shortage takes place prices generally rise until the quantity supplied matches the quantity demanded

Reaching the Equilibrium Price

Equilibrium Price in Real Life

• Anytime there is an imbalance in quantity demand and quantity supplied you have disequilibrium and the process of finding equilibrium starts over again.

Section 2

•Prices as Signals and Incentives

How the Price System Works

Competitive Pricing occurs when producers sell goods and services at prices that best balance the twin desires of making the highest profit and luring customers away from rival producers

How the Price System Works

There are 4 characteristics of a price system: 1. It is neutral – prices don’t favor either the producer or

consumer

2. It is market driven – market forces, not central planning determine prices

3. It is flexible – When market conditions change prices are able to change quickly

4. It is efficient – Prices will adjust until the maximum number of goods and services are sold.

Prices Motivate Producers and Consumers

Because of the basic laws of supply and demand Consumers want to buy items at the lowest possible prices and producers want to get the maximum amount of profit possible at the same time they put into play incentives or a way to encourage people to take a certain action.

Prices Motivate Producers and Consumers

For producers the price system has 2 major advantages: It provides both information and motivation

Prices act as signals and incentives for consumers as well. Advertising from producers

Encouragement that low prices wont last and they need to buy now or lose the opportunity

High prices discourage consumers

Price is the most important factor but the other influences from producers on consumers also effects consumers

Section 3

•Intervention in the Price System

Imposing Price Ceilings

Sometimes in order to prevent a price from getting to high people set a price ceiling (limit to how high a price can go)

An example : College Football tickets : If you sale them for $30 a ticket for a 50,000 seat stadium and 100,000 people want tickets you could naturally let ticket prices rise until the demand equaled the number of tickets being sold OR you could set a price ceiling and let the demand remain higher than the supply.

Setting Price Floors

A price floor is opposite of a price ceiling and sets the absolute minimum price an item can be sold at.

Minimum wage is an example of a price floor stating the absolute minimum that a business must pay their employees.

If a minimum wage is set to high then businesses may feel it is not profitable to hire more workers they will hire less employees.

Rationing Resources and Products

Rationing is a system in which the government allocates goods by a means other than price to the people. This is generally in a Communist type society where everyone gets

the same goods and services so the Government rations (distributes) them out equally to the people

When this happens a lot of time people will go to a black market (where goods and services are illegally bought and sold in violation of price controls or rationing)