Post on 30-Mar-2015
CHAPTER 6: PRICESPRICES
(SUPPLY AND DEMAND TOGETHER)(SUPPLY AND DEMAND TOGETHER)
Review
• What does the law of supply state?– As price rises, quantity supplied rises.As price rises, quantity supplied rises.– Looking through the eyes of the PRODUCER!Looking through the eyes of the PRODUCER!
• What does the law of demand state?– As price rises, quantity demanded falls.– Looking through the eyes of the CONSUMER!
Supply and Demand TogetherSupply and Demand Together
Equilibrium PriceEquilibrium Price The price that The price that balances supply and balances supply and
demanddemand.. Perfect price to charge for the Perfect price to charge for the product. No product. No surplussurplus or or shortages.shortages.
Equilibrium QuantityEquilibrium Quantity Quantity that balances Quantity that balances supply and supply and
demand.demand. Both of these are located where the Both of these are located where the
supply and demand curve meetsupply and demand curve meet..
DEMAND and SUPPLYDEMAND and SUPPLYTOGETHER AT LAST
350 400400 450 500 550 600 650
789
10111213
Demand
Supply
$Equilibrium Price
(market clearing price)
This is the perfect price This is the perfect price to charge for a good.to charge for a good.
Quantity
What is the equilibrium price?What is the equilibrium price?What is the equilibrium quantity?What is the equilibrium quantity?
Market Equilibrium
Price of Cards
(Dollars)
Quantity Supplied
(per month)
Quantity Demanded (per month)
Condition in the
Market
Direction of Pressure
on Price
12 600 450
10 550 550
8 500 650
350 400400 450 500 550 600 650
789
10111213
Excess Supply
Downward
• This table and graph indicate the demand and supply conditions for oversized playing cards.
• The Equilibrium will occur where the quantity demanded equals the quantity supplied.
• A price of $12 in this market will result in . . . resulting in excess supply.
quantity supplied of 600 . . .
• With an excess supply present, there will be downward pressure on price to clear the market.
Demand
Supply
Quantity Demanded = 450
Quantity Supplied= 600
quantity demanded of 450 and
$
<
Price of Cards
(Dollars)
Quantity Supplied
(per month)
Quantity Demanded (per month)
Condition in the
Market
Direction of Pressure
on Price
12 600 450
10 550 550
8 500 650
350 400400 450 500 550 600 650
789
10111213
Excess Excess SupplySupply
• A price of $8 in this market will result in . . . resulting in excess demand.
quantity demanded of 650 . . .
• With an excess demand present, there will be upward pressure on price to clear the market.
Demand
Supply
Quantity Demanded = 650
Quantity Supplied= 500
quantity supplied of 500 and
< ExcessExcessDemandDemand UpwardUpward
$
Market Equilibrium
DownwardDownward
<
Price of Cards
(Dollars)
Quantity Supplied
(per month)
Quantity Demanded (per month)
Condition in the
Market
Direction of Pressure
on Price
12 600 450
10 550 550
8 500 650
350 400400 450 500 550 600 650
789
10111213
Excess Supply Downward
Demand
Supply
Quantity Demanded = 550
Quantity Supplied= 550
=<
Balance Equilibrium
ExcessDemand
Upward
• A price of $10 in this market will result in . . . resulting in a balance. quantity demanded of 550 . . .
• With a balance present, there will be an equilibrium and the market will clear.
quantity supplied of 550 and
$
Market Equilibrium
<
•QS= Quantity Supplied•QD= Quantity Demanded
•QS > QD = excess supply and downward pressure on price
•QS = QD = Equilibrium
•QS < QD = Excess demand and upward pressure on price
Price of Cards
(Dollars)
Quantity Supplied
(per month)
Quantity Demanded (per month)
Condition in the
Market
Direction of Pressure
on Price
12 600 450
10 550 550
8 500 650
350 400400 450 500 550 600 650
789
10111213
=<
Excess Supply Downward
Balance Equilibrium
ExcessDemand Upward
• At every price above market equilibrium there is a surplus and there will be downward pressure on the price level.• At every price below market equilibrium there is a shortage and there will be upward pressure on the price level.• Prices will normally return to equilibrium.
EquilibriumPrice
$
Market Equilibrium
ShortageSupply
Demand
Surplus<
Any questions Any questions on that?on that?
Effects of a Change in SupplyEffects of a Change in Supply
If Supply If Supply decreasesdecreases, the , the equilibrium price will equilibrium price will riserise and the equilibrium and the equilibrium quantity will quantity will fallfall..
If Supply If Supply increasesincreases, the , the equilibrium price will equilibrium price will fallfall and the equilibrium and the equilibrium quantity will rise.quantity will rise.
350350 400400400400 450450 500500 550550 600600 650650
778899
1010111112121313
DemandDemand
SupplySupply
$$
QuantityQuantity
• Consider the market for winewine.
Price($ per bottle)
24
22
20
18
16
Q1
Demand
• Prior to a season of bad weather affecting the amount of grapes, an equilibrium exists where Supply
equals Demand1 with a market
price of $18 and output of Q1.
Q2
• The bad weather arrives: the supply of wine falls, decreasing the supply
from supply1 to supply2. What
happens to the equilibrium price and output level?• At $18 a bottle the quantity
demanded exceeds the quantity supplied. There is upward pressure on price inducing the existing consumers to decrease their quantity
demanded to Q2, drawing up the
equilibrium price to $20.• What happens to equilibrium What happens to equilibrium price and output when the weather price and output when the weather returns to normal?returns to normal?
Market Adjustment to a Market Adjustment to a Decrease in SupplyDecrease in Supply
Supply2
Supply1
Quantity(million bottles
per week)
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DEMAND AND SUPPLYMOVEMENT ON THE CURVE vs. SHIFT OF THE CURVE
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PUTTING THE TWO CURVES TOGETHERPUTTING THE TWO CURVES TOGETHER
DEMAND & SUPPLYDEMAND & SUPPLY
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INCREASE IN DEMANDINCREASE IN DEMAND
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DECREASE IN SUPPLYDECREASE IN SUPPLY
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INCREASE IN DEMANDINCREASE IN DEMAND
DECREASE IN SUPPLYDECREASE IN SUPPLY
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DEMAND & SUPPLYDEMAND & SUPPLYWhat can the concepts of supply and demand What can the concepts of supply and demand help us do?help us do? … …illustrate changes in different markets.illustrate changes in different markets.
Source: Wall Street Journal Feb 2008 (beginning signs of recession)Source: Wall Street Journal Feb 2008 (beginning signs of recession)
DEMAND & SUPPLYDEMAND & SUPPLYWhat can the concepts of supply and demand What can the concepts of supply and demand help us do?help us do? … …illustrate changes in different markets.illustrate changes in different markets.
The concepts help us understand the The concepts help us understand the cause of changes in price (such as cause of changes in price (such as during Hurricane Katrina & Gustav)during Hurricane Katrina & Gustav)
About 3,900 oil rigs in the gulfAbout 3,900 oil rigs in the gulf
Hurricane Ike Sept 11 2008Hurricane Ike Sept 11 2008
Price Ceilings Price Ceilings & & Price FloorsPrice Floors(When prices seem unfair)(When prices seem unfair)
Supply, Demand and Government PoliciesSupply, Demand and Government Policies
In a In a “free”“free” purely capitalist market purely capitalist market systemsystem, only supply and demand , only supply and demand establishes equilibrium prices and establishes equilibrium prices and quantities.quantities.
However, in our However, in our mixed economymixed economy sometimes equilibrium prices are set by sometimes equilibrium prices are set by the government. the government.
These are know as These are know as price controlsprice controls!!
Price Ceilings & Price FloorsPrice Ceilings & Price Floors
Government Price ControlsGovernment Price Controls
They are usually enacted They are usually enacted when policymakers when policymakers believe that the market believe that the market price is price is unfairunfair to buyers to buyers and even sellers. and even sellers.
This results in This results in governmental policies, governmental policies, such as such as price ceilingsprice ceilings and and price floorsprice floors. .
A Price Ceiling (below equilibrium)– is a legally established maximum price which a
seller can charge or a buyer must pay.
– Helps get rid of a surplus (it can cause a shortage)
– Protects consumers
A Price Floor (above equilibrium)– is a legally established minimum price which a
seller can charge or a buyer must pay.
– Helps get rid of a shortage (it causes a surplus)
– Protects producers and workers
Price Ceilings & Price Floors
When the government imposes a price ceiling (a legal maximum price at which a good can be sold) two outcomes are possible:
1) The price ceiling is NOT EFFECTIVE.
2) The price ceiling is EFFECTIVE and causes Shortages.
When government imposes a price floor (a legal minimum price) the two outcomes are possible:
1) The price floor is NOT EFFECTIVE.
2) The price floor is EFFECTIVE and causes a Surplus.
Price Ceilings & Price Floors
o
1
2
3
45
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SURPLUS
SHORTAGE
$6
PRICEFLOOR
PRICECEILING
10 20 35 55 80
Price Ceilings & Price FloorsPrice Ceilings & Price Floors
A A effectiveeffective Price Ceiling on Rent Price Ceiling on Rent
Price CeilingPrice Ceiling
PPCC
illegal $illegal $
Legal $Legal $
RentRentSupply of Supply of
ApartmentsApartments
Demand for Demand for ApartmentsApartments
RentRent
Quantity of Quantity of ApartmentsApartments
EXAMPLE: Think about EXAMPLE: Think about rent controlrent control
PPEE
QQEEQQSS QQDD
ShortageShortage
Price FloorsPrice Floors
Impacts of a Price FloorImpacts of a Price Floor
One reason to establish a price floor is to protect the producer (such as a new farmer who is competing against larger farming corporations).
The price floor keeps the larger companies from charging a lower price than the new farmer can charge.
Price floors can also be used to protect workers (such as minimum wage)
A A EffectiveEffective Price Floor Price Floor
SupplySupply
QuantityQuantityQQEE
PricePriceFloorFloor
PPFF
EXAMPLE: Think about EXAMPLE: Think about the poor farmerthe poor farmer andand minimum wageminimum wage
illegal $illegal $
Legal $Legal $PricePrice
DemandDemand
PPEE
The Labor Market:The Labor Market:Minimum Wage Laws Minimum Wage Laws & &
the concept of the concept of Price Price FloorsFloors
Labor SupplyLabor Supply
Labor DemandLabor Demand
EquilibriumEquilibriumUnemploymentUnemployment
Quantity of LaborQuantity of Labor
WageWage
EquilibriumEquilibriumWageWage
The Labor Market: Minimum WageThe Labor Market: Minimum Wage
00
Labor Supply
Labor Demand
Wage
A Labor Market with an effective A Labor Market with an effective price floorprice floor for Minimum Wage for Minimum Wage
Quantitysupplied
Quantitydemanded
$10.00Minimum
Wage
0 Quantity of Labor
Gas Market and a Price CeilingGas Market and a Price CeilingA Price CeilingPrice Ceiling creates shortages.
ExampleExample:: US government set price ceilings for gasoline in
1974.
The Vietnam War was consuming much of the fuel. So the US government established a maximum price for gasoline to settle consumer’s fears that the war would cause gas prices to soar.
Unfortunately, suppliers feared that the lower price (price ceiling) would cause not only shortages, but lower profits. (so they limited the (so they limited the supply of gas)supply of gas)
Combine the price ceiling with limited supply with the OPEC Oil Embargo and you have massive shortages for fuel.
DemandDemand
Price ofPrice ofGasolineGasoline
QuantityQuantity
PP11
00 QQ11
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Price ceilingPrice ceiling
1. Initially, the price ceiling1. Initially, the price ceiling was not effective...was not effective...
1970’s Market for Gasoline1970’s Market for Gasolinewith a Price Ceilingwith a Price Ceiling
DemandDemand
00 QQ11
PP22
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2. ...but when supply2. ...but when supplyfell ...fell ...
1970’s Market for Gasoline1970’s Market for Gasolinewith a Price Ceilingwith a Price Ceiling
Price ofPrice ofGasolineGasoline
QuantityQuantity
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Price ceilingPrice ceiling
DemandDemand
00 QQ11
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3. ...the price ceiling3. ...the price ceilingcauses a causes a shortageshortage..
ShortageShortage
Price ofPrice ofGasolineGasoline
1970’s Market for Gasoline1970’s Market for Gasolinewith a Price Ceilingwith a Price Ceiling
SS11
Price ceilingPrice ceiling
QuantityQuantity
QUICK QUIZANSWER THE FOLLOWING ON YOUR OWN PAPER
1. What is the equilibrium price? At the equilibrium price will you ever have a shortage or surplus?
3. If you set the price for Good X BELOW the equilibrium price will you have a shortage or surplus?
4. Draw the Demand and Supply curves together. What will happen to the equilibrium price & quantity if the demand curve shifts to the left?
Decrease in price and decrease in quantity neededDecrease in price and decrease in quantity needed
The price where quantity supplied equals quantity demanded. You will never have a shortage or surplus.
2. If you set the price for Good X ABOVE the equilibrium price will you have a shortage or surplus?
Surplus
Shortage
5. A price ceiling will create a shortage or surplus?
ShortageShortage
6. A price floor is designed to protect who?
Producers & WorkersProducers & Workers
STUDY AND GET YOUR NOTES
TOGETHER
EMAIL ME ANY QUESTIONS
ANY QUESTIONS?ANY QUESTIONS?