chapter 6: prices
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Chapter 6: Prices. Section 1: Combining Supply & Demand. 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. Balancing the Market. - PowerPoint PPT PresentationTRANSCRIPT
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Chapter 6: PricesSection 1: Combining
Supply & Demand
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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
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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
Balancing the Market
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Comparing these schedules should allow us to find common ground for the two sides of the market
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Point where demand & supply come together at the same number
Market for a good is stableQuantities supplied & demanded will be equal at only one price & one quantity
Defining Equilibrium
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Pric
e pe
r sl
ice
Equilibrium Point
Finding Equilibrium
Price of a slice
of pizza
Quantity demande
d
Quantity supplied Result
Combined Supply and Demand Schedule
$ .50 300 100
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$.50Slices of pizza per day
0 50 100 150 200
250 300 350
Supply Demand
$2.00
$2.50
$3.00
150
100
50
250
300
350
Surplus from excess supply
$1.50 200 200 Equilibrium
Equilibrium Price
a
Equi
libriu
m
Quan
tity
$1.00 250 150Shortage from excess demand
Balancing the Market
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If the market price or quantity supplied is anywhere but at equilibrium
Can produce either excess demand or supply
Disequilibrium
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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
Excess Demand
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As long as there is excess demand, & quantity demanded exceeds the quantity supplied, suppliers will keep raising prices
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When the price has risen enough to close the gap, suppliers will have found the highest price that the market will bear
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If the price is too highAfter a short time, owners will cut prices◦Quantity demanded will rise
◦What is another name for excess supply?
Excess Supply
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Impose price ceilings◦ Maximum price that can be legally charged for a good
Create price floors◦Minimum price for a good or service
Government Intervention
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Placed on some goods that are considered “essential” & might become too expensive for some consumers
Price Ceilings
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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
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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
The Cost of Price Ceilings
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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
Ending Rent Control
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Landlords would also have a great incentive to properly maintain the buildings & invest in new construction
Other hand◦People would lose their homes
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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
Price Floors
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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
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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
Price Supports in Agriculture
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Today government responded to low prices by providing emergency financial aid to farmers