Chapter 6 Prices. 1. Combining Supply and Demand 2. Changes in the Market Equilibrium 3. The Role of Prices

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1 Chapter 6 rices 1. Combining Supply and Demand 2. Changes in the Market quilibrium 3. The Role of rices What is the right price customers will pay? Answer... What ever Bob Barker tells them! Drew Carry! Are you kidding me!

2 1. Combining Supply and Demand Reaching quilibrium -quantity demand is equal to quantity supplied Market benefits -both buyers and sellers benefit Disequilibrium -Any price or quantity not at equilibrium rice of Slice of izza Quantity Demanded Quantity Supplied Result $ SHORTAG $ SHORTAG $ QUILIBRIUM $ SURLUS $ SURLUS $ SURLUS

3 Graphing quilibrium When supply reaches demand, the market reaches equilibrium, or balance. At the point of equilibrium, how many slices will the pizzeria supply at what price? R I C R Demand quilibrium S L I C Slice of izza per Day Supply

4 Shortage v. Surplus Shortage -excess demand -quantity demanded is more than quantity supplied Suppliers will raise prices and demand will lessen Surplus -quantity supplied is more than quantity demanded Suppliers will lower prices and demand will increase

5 Shortage How much is the shortage when pizza is sold at $2.00 per slice? R I C R S L I C Quantity Supplied Demand Supply quilibrium xcess Demand Slice of izza per Day Quantity Demanded

6 Surplus What might the pizzeria solve the problem of excess supply? R I C Demand xcess Supply R 3.00 quilibrium S L I C Slice of izza per Day Supply

7 rice Ceiling A Maximum price that can legally be charged for a good or service Rent control -a a price ceiling placed on apartment rent

8 rice Floors A minimum price for a good or a service Minimum Wage -minimum price an employer can pay a worker for one hour of labor ffects of Minimum Wage At what wage is the labor and market at equilibrium? What happens to the labor supply when the minimum wage is set at $7.25 per hour? What about demand for workers r i c e $7.25 o f $6. 60 L a b o r Labor Supply of Laborers Demand for Workers

9 2. Changes in the Market quilibrium Moving toward quilibrium Shortage - firms raise prices - demand falls Surplus -firms lower prices - demand rises

10 Two Factors A shift in the supply curve A shift in the demand curve

11 An increase In Supply r i c e 15 5 Increase in Supply Supply Curve Output New Supply Curve A Changing Market -factors that shift supply curve- technology, government, and prices Find the quilibrium -take inventory-quantity of goods that a firm has on hand increase in supply = surplus = lower prices and more demand shift to the right Changing quilibrium - quilibrium is always in motion in the real life market

12 A Decrease In Supply Decrease in Supply Changes in rice of Raw Materials Natural Disasters or problems at the factory Decrease in supply = shortage = higher prices and less demand = shift to the left r i c e 15 New Supply Curve Supply Curve Output

13 $500 $400 r $300 i c e$200 $100 Falling rices Year Digital Cameras $1000 $800 $600 $400 $200 Shifting Supply Curve Quantity In 1998, a digital camera sold for over $ What accounts for the trend in digital camera prices? What do you suppose will continue to happen to the digital camera r i c e

14 An Increase in Demand Fad -a a product that does very well for a short period of time The Shortage problem - throws market off balance creating a decrease in supply Return to quilibrium - firms react by increasing prices and supply increase in demand = shortage = increase prices and less supplied - shift to right R I C Increase in Demand Original Demand Quantity New Demand

15 A Decrease in Demand $3 Decrease in Demand New Demand Original Demand R I C When a fad ends, demand falls and shortage turns to surplus decrease in demand = surplus = lower prices and higher supply - shift to left $2 3 4 Quantity

16 3. The Role of rices rices in the Free Market Key element of equilibrium can solve problems of shortage or surplus prices are a tool for distributing goods and resources throughout the economy

17 The Advantages of rices rovides a common language for buyers and sellers rices as an incentive-buy one get one rices as Signals -gives buyers and sellers signs Flexibility -prices are flexible

18 Choice and fficiency in Free Market Diversity of goods and services that a consumer can buy Based on income, consumers can purchase whatever item suits their needs

19 Choice and fficiency in One organization or centralized government controls what goods are produced and how much stores will charge led to Rationing- system of allocating resources using criteria other than price Supply Shock - shortage of a good and a long time to wait for a good both led to Black Market - goods sold illegally Command Market

20 The rofit Incentive What people buy gives sellers clues to make more Sellers give buyers rewards buy offering special prices or deals