Markets, Equilibrium, & Price How Do You Know When the Price is Right?
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Transcript of Markets, Equilibrium, & Price How Do You Know When the Price is Right?
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 EquilibriumOn a graph, equilibrium is found at the point where the demand and supply curves interact
Price Watermelons Demanded
WatermelonsSupplied
$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
Graph the Supply & Demand for Watermelons
6.00
5.50
5.00
4.50
4.00
100 150 200 250 300 350
Price Watermelons Demanded
WatermelonsSupplied
$4.00 300 100
4.50 250 150
5.00 200 200
5.50 150 250
6.00 100 300
0
4.00
4.50
5.00
5.50
6.00
100 150 200 250 300 350
.
.
.
.
.
DEMAND
. SUPPLY
Equilibrium Price
Equi
libriu
m Q
uanti
ty
Pric
e
Quantity of Watermelons
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 SchedulePrice Quantity
DemandedQuantity Supplied Outcome
$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
Graph Your Demand and Supply Curves
Shortage fromExcess demand
Equilibrium
Surplus fromExcess supply
Smoothie Demand and Supply
3.50
3.00
2.50
2.00
1.50
1000 2000 3000 4000 5,000 6,000
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
S1
D1
Surplus
Shortage
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
3.50
3.00
2.50
2.00
1.50
1000 2000 3000 4000 5,000 6,000
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
S1
D1
D2
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
3.50
3.00
2.50
2.00
1.50
1000 2000 3000 4000 5,000 6,000
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
S1
D1
S2
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 illegalEx: 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
• Price ceilings cause: ______________shortage
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 illegalEx: 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
• Price floors cause ________________surplus
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!