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Today’s Objectives

Today’s Objectives. You will… Understand how to graph supply, demand, and find equilibrium prices and quantities Understand what a market is and how buyers and sellers interact How surpluses and shortages come about The influence the government can have on prices.

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Today’s Objectives

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  1. Today’s Objectives • You will… • Understand how to graph supply, demand, and find equilibrium prices and quantities • Understand what a market is and how buyers and sellers interact • How surpluses and shortages come about • The influence the government can have on prices

  2. Markets, Equilibrium & Prices PRICE QTY

  3. When Supply and Demand Meet • Equilibrium – when demand and supply meet • Sets price that goods will be bought and sold • Referred to as market equilibrium • Price set is known as the equilibrium price • Also known as the “market-clearing price” • There would be no extra product or wants • Equilibrium quantity – qty. marked at equilibrium

  4. Prices Bring Markets to Balance • What is a market? • Any place where buyers and sellers come together for a product • Prices always move dependent on buyers and sellers • Buyers only willing to pay a certain price • Sellers want to sell at a high price • Sets the “market price” – willing to pay price • If people price things low… • They sell out, need to make more, but can raise prices • If people price things high… • They don’t sell, lower the price, and clear inventory

  5. “What Happens When the Price is Wrong? • When the prices are wrong – considered to be in disequilibrium • Leads to either excess supply or excess demand • Excess Supply – Price is too HIGH • Excess Demand – Quantity was too LOW • Prices eventually shift, but takes time

  6. Price Too Low – Shortages Created • Excess demand – not enough of a product • Shortage created • Price is too low • To get to equilibrium price would need to rise 4000 still demanded at this price

  7. Price Too High – Surplus Created • Excess supply – too much of a product • Creates surplus • Price is to high • To reach equilibrium the price will need to be reduced 4000 extra products at this price

  8. Shifts in Supply and Demand • Factors cause shifts in entire lines • Supply and demand shifters • Creates changes in prices • 3 questions to ask when equilibrium changes • Does it affect supply? demand? or both? • Does it shift the line to the right or to the left? • What is the new price and quantity w/ the change?

  9. How Price is Affected by Demand Shift Report on smoothies being good for you increases demand (shifts right) – leads to higher equilibrium price • Demand shifts for many reasons • New line is created; changes the price • Increase in demand -> higher price • Decrease in demand -> lower price

  10. How Price is Affected by a Supply Shift Poor harvest leads to a shift in supplies for smoothies– leads to higher equilibrium price • Supply shifts for many reasons • New line is created; affects the price • Decrease in supply -> higher price • Increase in supply -> lower price

  11. What If Both Shift? • When both shift, a new equilibrium is found • Can mean numerous outcomes Now both supply and demand increase – leads to more quantity and higher price

  12. What Do The Shifts Tell Us? • Changes in prices tell us many things • Sellers how much to produce (more/less) • Sellers how much to charge • Shows buyers interest (demand) for a product • Prices give us incentives • Encourages us to produce more to make profit • Allows markets to adjust to changing conditions • Helps to respond to global issues • Helps to use resources efficiently

  13. What Happens When the Government is Involved? • Government gets involved “for the common good” • Believe prices are too high or too low • Affect prices in two ways • Price ceilings – setting a MAX PRICE • Price floors – setting a MIN PRICE • Creates shortages which can lead to “black markets” • Difficult to stop gov’t control due to political pressures from those it benefits

  14. www.youtube.com/watch?v=kID3lnFM_EI • Video on market equilibrium • https://www.youtube.com/watch?v=R0h8kfA4i_A&list=TLnFFbCQEoue0Vhct6AvNXIpECdFnHJ3bK • Video on price ceilings (rent control) • https://www.youtube.com/watch?v=R12m0QHweGg • Video on invisible hand • http://www.youtube.com/watch?v=wbU6TdrnqmU • Video on price floors and ceilings (lecture)

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