Chapter 6: Prices

1. Chapter 6: Prices Section 1: Combining Supply & Demand

2. The market system makes certain that consumers can buy products they want, that sellers make enough profit to stay in business & that sellers respond to changing needs & tastes of consumers

3. Balancing the Market • The demand schedule shows how much consumers are willing to buy at various prices • Supply schedule shows how much sellers are willing to sell at various prices

4. Comparing these schedules should allow us to find common ground for the two sides of the market

5. Defining Equilibrium • Point where demand & supply come together at the same number • Market for a good is stable • Quantities supplied & demanded will be equal at only one price & one quantity

6. Finding Equilibrium Equilibrium Point Combined Supply and Demand Schedule $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $.50 Price of a slice of pizza Quantity demanded Quantity supplied Result $ .50 300 100 Shortage from excess demand Price per slice a Equilibrium Price $1.00 250 150 $1.50 200 200 Equilibrium Equilibrium Quantity $2.00 150 250 Supply Demand Surplus from excess supply $2.50 100 300 0 50 100 150 200 250 300 350 350 $3.00 50 Slices of pizza per day Balancing the Market

7. Disequilibrium • If the market price or quantity supplied is anywhere but at equilibrium • Can produce either excess demand or supply

8. Excess Demand • Quantity demanded is more than quantity supplied • When actual price in a market is below the equilibrium price because low price encourage buyers & discouraged sellers • Name a good or service that has experienced excess demand

9. As long as there is excess demand, & quantity demanded exceeds the quantity supplied, suppliers will keep raising prices

10. When the price has risen enough to close the gap, suppliers will have found the highest price that the market will bear

11. Excess Supply • If the price is too high • After a short time, owners will cut prices • Quantity demanded will rise • What is another name for excess supply?

12. Government Intervention • Impose price ceilings • Maximum price that can be legally charged for a good • Create price floors • Minimum price for a good or service

13. Price Ceilings • Placed on some goods that are considered “essential” & might become too expensive for some consumers

14. Rent Control • Reduces the quantity & quality of housing • Landlords will have difficulty earning profits or breaking even so fewer new apartment buildings will be built & older ones might be converted into offices, stores, or condos

15. The Cost of Price Ceilings • Market must determine which 20,000 of the 40,000 households will get an apartment • Leads to long waiting lists, discrimination by landlords, & bribery • Many apartment buildings have become rundown

16. Ending Rent Control • If rents were allowed to rise, the number of apartments available would rise to 30,000 • Many who could afford $900/month would find a large selection of apartments

17. Landlords would also have a great incentive to properly maintain the buildings & invest in new construction • Other hand • People would lose their homes

18. Price Floors • Imposed when government’s want sellers to receive some minimum reward for their efforts • The minimum wage • Federal government sets a base wage & states can go higher • Full time minimum wage worker will earn less than what is necessary for a couple with one child

19. If the wage is set above market equilibrium wage rate, there will be a decrease in employment • If the wage is below equilibrium, it will have no effect because employers would have to pay at least the equilibrium rate to find workers

20. Price Supports in Agriculture • Whenever the price fell below the price floor, the government created demand by buying excess crops • Congress abolished these programs in 1996 because they conflicted with free enterprise

21. Today government responded to low prices by providing emergency financial aid to farmers