Prices and Equilibrium

Flexible

• Unforeseen events such as natural disasters and war affect the prices of many items

• Buyers and sellers react to the new level of prices and adjust their consumption and production accordingly

• Absorbs unexpected “shocks” and allows to accommodate change

• I.e. Computer Industry

Advantages of a Price System

• Prices link the producers and consumers; and allow allocation of goods and services to be smooth and efficient

PRICES AS SIGNALS

Price

• The monetary value of a product as established by supply and demand

• Turn to a partner in the room and have a discussion. Answer the questions: • Are prices fair? • Should the government help dictate prices? • In what situations do you think government should dictate

prices?

Neutral

• Prices in a competitive market economy are neutral because they favor neither the producers nor the consumers

• Represent compromise

Efficient

• No cost of administration• Competitive markets tend to find their own prices

without outside help or interference; no bureaucrats, committees, or laws are necessary

Understood to all

• Prices are something that we have known all our lives, from the time we were old enough to ask our parents to buy us something to the age we were old enough to buy it for ourselves.

• There is no ambiguity

Without Price

• What would be done if we did not use price as a means to distribute goods and services? What options exist?

Rationing

• A system under which an agency such as the government decides everyone’s “fair” share

• People receive Ration Coupons, which is a ticket or a receipt that entitles the holder to obtain a certain amount of a product

• What are all the problems with rationing?

Problems with Rationing

• The Problem of Fairness• High Administrative Costs• Diminishing Incentive

Prices as a System

• After reading the information on page 140 about prices as a system, explain in your own words how prices act as a system which tells the market where resources should be allocated

Graphing Market Demand and Supply Curves

• Take the large piece of paper and fold it in half three separate times to create 8 squares/sections for use of drawing graphs

THE PRICE SYSTEM AT WORK/SOCIAL GOALS VS. MARKET EFFICIENCY

Economic Model

• A set of assumptions that can be listed in a table, illustrated with a graph, or even stated algebraically

• Allows us to analyze how the interaction of buyers ad sellers results in a price that is agreeable by all

Square #1: Market Equilibrium

• Draw a graph which has price labeled on the Y-axis and Quantity labeled on the X-axis. Then draw an example Demand Curve and an example Supply Curve in the graph

• Use the graph to draw in a point labeled “E” where one would find Market equilibrium

• Explain off to the side what Market equilibrium is and what Price Equilibrium means

• A situation in which prices are relatively stable, and the quantity of goods and services supplied is equal to the quantity demanded; quantity supplied = quantity demanded

• Found through trial and error• Measures the reaction of buyers and sellers in the marketplace • Equilibrium Price- the price that “clears the market” by leaving neither a

surplus nor a shortage at the end of the trading period

Square #2: Surplus

• Draw a graph which has price labeled on the Y-axis and Quantity labeled on the X-axis. Then draw an example Demand Curve and an example Supply Curve in the graph

• Find a price on the graph that would display a surplus of a product.

• What is a surplus? A situation in which the quantity supplied is greater than the quantity demanded

• What will tend to happen if a surplus does exist?

Square #3: Shortage

• Draw a graph which has price labeled on the Y-axis and Quantity labeled on the X-axis. Then draw an example Demand Curve and an example Supply Curve in the graph

• Find a price on the graph that would display a shortage of a product.

• What is a shortage? A situation in which the quantity supplied is less than the quantity demanded

• What will tend to happen if a shortage does exist?

Square #4: Changes in Supply

• Draw a graph which has price labeled on the Y-axis and Quantity labeled on the X-axis. Then draw an example Demand Curve and an example Supply Curve in the graph

• Use a different color pen/pencil and draw a line representing an increase in Supply. Using the same color pen/pencil, write down what happens to the price and the quantity because of this increase in supply

• Use a different color pen/pencil and draw a line representing an decrease in Supply. Using the same color pen/pencil, write down what happens to the price and the quantity because of this decrease in supply

Square #5: Changes in Demand

• Draw a graph which has price labeled on the Y-axis and Quantity labeled on the X-axis. Then draw an example Demand Curve and an example Supply Curve in the graph.

• Use a different color pen/pencil and draw a line representing an increase in demand. Using the same color pen/pencil, write down what happens to the price and the quantity because of this increase in demand

• Use a different color pen/pencil and draw a line representing an decrease in demand. Using the same color pen/pencil, write down what happens to the price and the quantity because of this decrease in demand

Social Goals vs. Market Efficiency

• Goals compatible with a Market economy? Freedom, Efficiency, Full employment, Price Stability, and Economic Growth

• In attempts to achieve Equity and Security, however, we may have to give up a little Efficiency and Freedom

Square #6: Price Ceilings

• Draw a graph which has price labeled on the Y-axis and Quantity labeled on the X-axis. Then draw an example Demand Curve and an example Supply Curve in the graph

• Use the graph to display a Price Ceiling• A maximum legal price that can be charged for a product• Explain what a price ceiling is and what is created by a price

ceiling.• Explain the example of Rent Controls and how it must abide

by price ceilings

Square #7: Price Floors

• Draw a graph which has price labeled on the Y-axis and Quantity labeled on the X-axis. Then draw an example Demand Curve and an example Supply Curve in the graph.

• Use the Graph to display Price Floors• Lowest legal price that can be paid for a good or service• Explain what a price floor is and what is created by a price

floor.• Explain the example of minimum wage and it must abide by

a price floor.

Agricultural Price Supports

• Commodity Credit Corporation (CCC)-1930s, put in place to help stabilize agricultural prices; assisted with loan payments and deficiency payments

• Target price-a price floor for farm products• Nonrecourse loan-a loan that carries neither a penalty or

further obligations to repay if not paid back • Deficiency payment-a check sent to producers that

makes up the difference between the actual market price and the target price