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![Page 1: Markets & Prices What If The Price Is Too High sellers have incentive to produce a lot buyers have incentive to consume a little excess supply (surplus)](https://reader036.fdocuments.in/reader036/viewer/2022070407/56649e295503460f94b17164/html5/thumbnails/1.jpg)
Markets & Prices Markets & Prices
What If The Price Is Too High
sellers have incentive to produce a lot buyers have incentive to consume a little excess supply (surplus) competition among sellers: P ↓ weeds out extra sellers, attracts additional buyers
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Excess Supply Excess Supply
Price ofIce-Cream
ConeSupplySupply
DemandDemand
QuantitydemandedQuantitydemanded
QuantitysuppliedQuantitysupplied
SurplusSurplusSurplus
Quantity ofIce-Cream
Cones
44
$2.50
10
$2.50
10
2.00
7
2.00
7
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Markets & Prices Markets & Prices
What If The Price Is Too Low
buyers have incentive to consume a lot sellers have incentive to produce a little excess demand (shortage) competition among buyers: P ↑ weeds out extra buyers, attracts additional sellers
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Excess Demand Excess Demand
Price ofIce-Cream
Cone
Quantity ofIce-Cream
Cones
SupplySupply
DemandDemand
QuantitysuppliedQuantitysupplied
QuantitydemandedQuantitydemanded
1.50
10
1.50
10
$2.00
7
$2.00
744
ShortageShortageShortage
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Gains From Trade Gains From Trade
Opportunity For Improvement
should a particular unit of a good be produced and consumed?
only if market participants can benefit from exchange
as long as someone is willing to pay more than it would cost a firm to produce the unit, then there are incentives to enter into the transaction
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Gains From trade Gains From trade
Quantity
PriceSupplySupply
DemandDemand
Costto
sellers
Costto
sellers
Costto
sellers
Costto
sellers
Valueto
buyers
Valueto
buyers
Valueto
buyers
ValueValueto
buyers
Value to buyers is greaterthan cost to sellers.Value to buyers is greaterthan cost to sellers.
Value to buyers is lessthan cost to sellers.Value to buyers is lessthan cost to sellers.
Equilibriumquantity
Equilibriumquantity
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Markets & Competition FTE Markets & Competition FTE
Competition Regulates Markets
buyers and sellers both gain from exchange prices adjust to encourage trade competition directs goods & services (resources)
to their most highly-valued uses
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Shocks Shocks
What If Market Conditions Change suppose something other than the price of a good changes
– price of inputs, technology– income, price of other goods, tastes & preferences
a change in market conditions will create a disequilibrium the price adjusts to bring the quantity supplied and the
quantity demanded into balance
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Shocks Shocks
Three Steps
does the event shift the supply curve or demand curve to the left or to the right
use the S & D diagram to see how the shift affects the equilibrium price and quantity
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Increase In Demand Increase In Demand
Price ofIce-Cream
Cone
Quantity of Ice-Cream Cones
SupplySupply
Initialequilibrium
Initialequilibrium
DD
DD
3. . . . and a higherquantity sold.3. . . . and a higherquantity sold.
2. . . . resultingin a higherprice . . .
2. . . . resultingin a higherprice . . .
2. . . . resultingin a higherprice . . .
1. Hot weather increasesthe demand for ice cream . . .1. Hot weather increasesthe demand for ice cream . . .
2.00
7
2.00
7
New equilibrium$2.50
10
New equilibrium$2.50
10
$2.50
10
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Increase In Demand Increase In Demand
Hot Weather
increased tastes & preferences demand curve shifts to the right shortage at initial equilibrium price P ↑ to restore equilibrium new equilibrium: higher P higher Q
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Factors That Shift Demand Factors That Shift Demand
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Factors That Shift Demand Factors That Shift Demand
Recall…..
if more people want a particular productD ↑ leads to P ↑
sends signal to producers that more is desired sellers respond to incentive of higher prices
ethanol and corn bellbottoms are all the rage this year cowbells?
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Decrease In Supply Decrease In Supply
Price ofIce-Cream
Cone
Quantity of Ice-Cream Cones
DemandDemand
Newequilibrium
Newequilibrium
Initial equilibrium
S1S1
S2S2
2. . . . resultingin a higherprice of icecream . . .
2. . . . resultingin a higherprice of icecream . . .
2. . . . resultingin a higherprice of icecream . . .
2. . . . resultingin a higherprice of icecream . . .
1. An increase in theprice of sugar reducesthe supply of ice cream. . .
1. An increase in theprice of sugar reducesthe supply of ice cream. . .
3. . . . and a lowerquantity sold.3. . . . and a lowerquantity sold.
2.00
7
2.00
7
$2.50
4
$2.50
4
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Decrease In Supply Decrease In Supply
Price Of Sugar Rises
increased price of input supply curve shifts to the left shortage at initial equilibrium price P ↑ to restore equilibrium new equilibrium: higher P lower Q
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Factors That Shift Supply Factors That Shift Supply
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Shocks Shocks
What Happens to Price and Quantity When Supply or Demand Shifts?
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Efficiency Efficiency
The Invisible Hand
guides decision-making rewards efficient producers and consumers goods society wants prices society is willing and able to pay
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Equilibrium Equilibrium
Price ofIce-Cream
Cone
1 2 3 4 5 6 7 8 9 10 11 12Quantity of Ice-Cream Cones
13
EquilibriumquantityEquilibriumquantityEquilibriumquantity
Equilibrium priceEquilibrium price EquilibriumEquilibrium
SupplySupply
DemandDemand
$2.00$2.00
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University of Wisconsin-Eau ClaireUniversity of Wisconsin-Eau Claire Markets in Action: Application 1 Markets in Action: Application 1
Two Sources Of Seasonal Variation
beachfront cottages apples
identify period of highest consumption will price be high or low?
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University of Wisconsin-Eau ClaireUniversity of Wisconsin-Eau Claire Markets in Action: Application 1 Markets in Action: Application 1
Two Sources of Seasonal Variation
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University of Wisconsin-Eau ClaireUniversity of Wisconsin-Eau Claire Markets in Action: Application 2 Markets in Action: Application 2
Corn and Beef
D for corn (ethanol) has led to P corn is main feed for cattle (used to produce beef) What happens in the market for beef?
Atkin’s Diet has people wanting more beef…..
Mad Cow scare in Nebraska meat plant…..
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University of Wisconsin-Eau ClaireUniversity of Wisconsin-Eau Claire Markets in Action: Application 3 Markets in Action: Application 3
Nursing Shortage
nursing is traditionally a women’s occupation new higher paying job opportunities for women What happens in the market for nurses?
an aging population has led to D for medical services…
apply similar analysis to teachers, truck drivers…
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University of Wisconsin-Eau ClaireUniversity of Wisconsin-Eau Claire Markets in Action: Application 4 Markets in Action: Application 4
Taxes, Markets & Government Revenue
$1 tax on each unit sold in the marketplace
How successful will this be in gasoline market?
How successful will this be in the cigarette market?
now consider the market for footwear…– black Converse Chuck Taylor high-tops…
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University of Wisconsin-Eau ClaireUniversity of Wisconsin-Eau ClaireMarkets in Action: Other QuestionsMarkets in Action: Other Questions
Why do houses ↑ in price after purchase, while automobiles ↓ in price after purchase?
How do consumers respond to price changes?– salt, public transportation, gasoline (what’s up with gas prices)
If there are more cranberries, how come the price is higher?
Why is there currently a shortage of nurses and truck drivers