In a free market economy, prices transmit information and serve to ration economic inputs. This leads to the economically most efficient allocation of resources in an economy.

For example, how do we decide how much paper and ink to dedicate to the creation of football collector cards? The company that wishes to create and sell the cards must find a supplier of paper and ink and negotiate a good price. If the input prices are too high, they may decide not to produce any cards. Thus, the society rations paper and ink away from the enjoyment of football card collectors. If the price is very low, the company may have resources available for other cost items, like paying photographers to get better pictures of the athletes.

The equilibrium price tells us this information after the market has balanced the interests of suppliers and consumers.

Football Economics:Price and Equilibrium

The Market

Football Economics:The Nature of Prices

The Types of Prices

• Cost in terms of currency

• The QB is paid $20M

Absolute (Money)

Price

• Cost in terms of others goods

• One QB salary is equal to two WR salaries

Relative Price

Football Economics:Price and Equilibrium

The Function of Prices

RationingDevice

Transmitter of

Information

Football Economics:Price and Equilibrium

Equilibrium, or Market Clearing, Price

Quantity Demanded

of the Good

Quantity Supplied

of the Good

Football Economics:Price and Equilibrium

Equilibrium, or Market Clearing, Price

Equilibrium E

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Football Economics:Price and Equilibrium

Surplus and Shortage

100 200 300 4000

100

200

300

400

500

600

700

800

SupplyDemand

Prices above equilibrium create a surplus

Prices below equilibrium create a shortage

E

Surplus: Excess supply means that sellers give price discounts to encourage sales.

Shortage: Inadequate supply means buyers bid up the price to get some of the limited quantity.

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Football Economics:Price and Equilibrium

When do we buy new helmets?

100 200 300 4000

100

200

300

400

500

600

700

800

SupplyBase Case Demand

Prices above equilibrium create a surplus

Prices below equilibrium create a shortage

E

Surpluses and shortages give price signals to any company. If you run a professional football team, you might need to decide if you want to purchase new helmets for your team.

Say the price is $400 for a helmet. Thus, Demand will be for 100 helmets and Supply will be 250 helmets. The oversupply of helmets is called a surplus and suppliers will make price cuts until they clear out their inventory. This happens at $300, with 200 helmets sold.

Or, assume the initial price was $100 for a helmet. Supply would be 100 and Demand would be for 400, a clear shortage. In this case, buyers would bid up the price, inducing additional supply until Demand is satisfied. This would occur at $300, with 200 helmets sold.

When will you buy helmets for your team? At the start of the shortage period, at the start of the surplus period? Understanding where the market is in the process of working toward equilibrium will make a big difference in you bottom-line.

Market Equilibrium for one package of premium football cards

Price Quantity Demanded Quantity Supplied $ - 19,000 15,000 $ 1.00 18,700 15,500 $ 2.00 18,400 16,000 $ 3.00 18,100 16,500 $ 4.00 17,800 17,000 $ 5.00 17,500 17,500 $ 6.00 17,200 18,000 $ 7.00 16,900 18,500 $ 8.00 16,600 19,000 $ 9.00 16,300 19,500 $ 10.00 16,000 20,000

This example shows both the demand of consumers at various prices and the quantity supplied by football card companies at those same prices. These can be represented as simple equations. In the real world, retailers often develop sophisticated equations for supply and demand based on credit card records.

Defining Equilibrium

The demand equation is represented by Qd

Qd = 19,000 - 300P

The supply equation is represented by Qs

Qs = 15,000 + 500P

The equilibrium condition is reached when they are balanced

Qs = Qd

Calculating EquilibriumCalculating Equilibrium

Qd = Qs19,000 -300P = 15,000 +500P800P=4000P=4000/800

At Equilibrium, Price Equals: $ 5.00

At Equilibrium, Quantity Equals:17,500

This shows the math necessary to solve for equilibrium price. After setting demand and supply to equal one another, Qd = Qs, we can solve for price, P. When the price equals $5.00 for a package of premium football cards, both consumers and suppliers are content with a quantity of 17,500 packages of premium football cards.

$-

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

15,000 15,500 16,000 16,500 17,000 17,500 18,000 18,500 19,000 19,500 20,000

Supply

Demand

Graphing Equilibrium

This shows the graph associated with the same equilibrium price. The Qs equation generates the blue line and the Qd equation generates the red line.

Why is this equilibrium “good” for society? The price accepted at equilibrium by suppliers implies that the resources they put to use (paper, ink, et cetera) have gone to the use that the society most values. Why? Because consumers have been willing to forego alternative purchases up to the $5.00 absolute price. Thus, no trade for other goods is preferred by consumers and the resources in the cards are considered efficiently allocated.