Prices: Combining Supply & Demand

1. Prices: Combining Supply & Demand Ch 6.1, p. 133

2. Words • Equilibrium • Disequilibrium • Shortage • Surplus • Price ceiling • Rent control • Price floor • Minimum wage

3. What’s all this about equilibrium? • A terrible movie. • Also: the point at which the demand for a product or service is exactly equal to the supply. • When they are not equal this is called disequilibrium.

4. Shortage • Shortage is when the quantity demanded outstrips the quantity supplied. • Think “Tickle Me, Elmo” • This is one example of disequilibrium

5. Fighting Shortage • Prices must go up, for demand to go down • This has the fortunate effect of reducing a shortage, BUT the unfortunate effect of causing a surplus • Surplus: when quantity supplied is more than quantity demanded

6. Defeating Surplus • Lower those prices, fool!

7. Markets Tend to Become Equalized • But occasionally the gov’t. gets involved and issues a price ceiling • A max price that can be legally charged • These price ceilings can be added to anything: food, gas, rent, etc. • For rent, it’s called rent control • Price ceiling are common in times of war or recession

8. Price Control Sucks • Leads to waiting lists, discrimination, bribery, cheating, unimproved property, and worse. • Buildings become rundown and ppl generally become upset.

9. What about Price Floors? • Price Floors: a minimum price for a good or service • Best example: minimum wage • Good for agriculture and manufacturing (book says) • FALSE.

10. Changes in Market Equilibrium Ch 6.2, p. 141

11. Terms • Inventory • Fad • Search costs

12. How do we measure $$? • That’s a tough question and many businesses use different approaches • Some look to market trends • Other options: • Receipts • Monitoring inventory: the quantity of goods that a firm has on hand

13. Cash vs. Accrual Accounting • http://www.youtube.com/watch?v=LU_6amWC6H8&safe=active

14. Changing Equilibrium • Really interesting concept: must affect demand to make more $ • Search costs: the financial and opportunity costs that consumers pay when searching for a good or service • For example: the amount of time it takes to find something you want on the internet

15. Generating Fads • How do we create a fad? • What advertising strategies work?

16. Q&A • What do fads reflect? • What kinds of goods require search costs? • Is a large inventory good or bad?

17. The Role of Prices Ch 6.3, p. 148

18. Vocab • Supply shock • Rationing • Black market

19. Prices in a Free Market • The weapon of choice • Prices are the tool for distributing goods and resources • They can single-handedly determine whether or not a business suceeds or fails.

20. Strategy • Price can be an Incentive

21. Strategy • Price can be a signal

22. Strategy • Price can be flexible • Can change on a moment’s notice because of supply shock • Think hurricanes and gas shortage • We can also ration goods and services based on other factors • Like 5 gallons per person per week

23. Strategy • Pricing is free! • AND THUS A FREE WEAPON

24. Black Markets • Black market: a market in which goods are sold illegally w/out regard for gov’t. controls on price or quantity • These tend to pop up with increased regulation or moral restrictions • Ivory • Drugs • Organs

25. Free Market Problems • 1. Imperfect competition: we don’t really know how things should be priced unless there’s lots of competition • 2. Negative externalities • 3. Imperfect information: in many cases it is in the best interest of businesses to lie

26. Chew on these. • How does supply shock affect businesses? • Why do buyers and sellers conduct business on a black market? • What is the quickest way to solve a shortage?