Chapter 6:1: Prices Reaching Equilibrium

“He keepeth the paths of

judgment, and preserveth the

way of his saints. Then shalt

thou understand righteousness,

and judgment, and equity; yea,

every good path.” Proverbs 2:8-

9

• WHAT: Explain how supply and demand create equilibrium in the marketplace.

• WHAT: Examine the concept of dis-equilibrium. • WHAT: Examine how the government intervenes

in markets to control prices and analyze the impact of price ceilings and price floors on a free market.

• WHY:(12.2 (2) Discuss the effects of changes in supply and/ or demand on the relative scarcity, price, and quantity of particular products.

• WHY: 12.2 (6). Describe the effect of price controls (Price Ceiling) Rent Control, (Price Floors) Minimum Wage, and (Price Supports) on buyers and sellers.

Scarcity: • People’s needs and wants are unlimited. • When one want is satisfied, others arise. • Goods and services are limited. • No one can have an endless supply of anything. • Sooner or later a limit is always reached. • The fact that limited accounts of goods and

services are available to meet unlimited wants is scarcity.

• Economics is the study of how people seek to satisfy their needs and wants by making choices.

Reaching Equilibrium: • Supply and Demand Meet.

• The point where demand and supply come together is called the equilibrium.

• Equilibrium is the point of balance at which the quantity demanded equals the quantity supplied.

• At equilibrium, the market for a good is stable.

Reaching Equilibrium:

• To find the equilibrium price and

quantity, look for the price at

which the quantity supplied

equals the quantity demanded.

• It is where the supply and

demand curve intersect.

Market Benefits:

• In any market supply and

demand will be equal at

only one price and one

quantity.

• At this equilibrium price,

buyers will purchase

exactly as much of a good

as firms are willing to sell.

Reaching Equilibrium: • Buyers who are willing to purchase

goods at the equilibrium price will find ample supplies on store shelves.

• Firms that sell at the equilibrium price will also find ample supplies on store shelves

• Firms that sell at the equilibrium price will find enough buyers for their goods.

• When a market is at equilibrium, both buyers and sellers benefit.

Disequilibrium: • If the market price or quantity

supplied is anywhere but at the equilibrium.

• The market is in a state of disequilibrium.

• Disequilibrium occurs when quantity supplied is not equal to quantity demand in a market.

• This can produce shortages or surpluses.

Shortage: • The problem of shortage also

known as excess demand exists.

• When the quantity demanded in a market is more than the quantity supplied.

• When the actual price in a market is below the equilibrium price, you have a shortage.

• Because the low price encourages buyers and discourages sellers.

Surplus and Shortages

From Shortage to Equilibrium: • When the price has risen enough to

close the gap.

• Suppliers will have found the highest price that the market will bear.

• They will continue to sell at the price until one of the factors described in supply or demand changes.

• Thus, creates new pressures to raise or lower prices and turns into a new equilibrium.

Surplus: • If the price is too high, the

market will face the problem of

surplus also known as excess

supply.

• A surplus exists when quantity

supply exceeds quantity

demanded.

• The actual price of a good is

higher than the equilibrium price.

Surplus and Shortages

From Shortage to Equilibrium: • When you raise a price of a good

customers have high demand for.

• They maybe willing to buy less since its becoming relatively more expensive.

• As long as there is a shortage and the quantity demanded exceeds the quantity supplied.

• Suppliers will keep raising the price.

APPLICATION: • Entertainment and video game

companies are phasing out physical CDs and DVD discs.

• Post them online for download as applications and streaming services like Itunes, Spotify, and Amazon Prime.

• So they no longer deal with surplus and shortages.

Surplus and Shortages

Price Ceiling:

• The government can impose a

price ceiling or a maximum

price that one can legally

charge for a good or service.

• The price ceiling is set below

the equilibrium price.

• Rent Control is an example of

a price ceiling.

Price Ceiling: (Rent Control) • Is a price ceiling placed on

apartment rents.

• It was used to prevent inflation during a housing crisis.

• It is also meant to help the poor to cut their housing costs and enable them to live in places they could otherwise not able to afford.

Price Ceiling: (Rent Control)

• Low price apartments seem

inexpensive.

• Many people will try to rent

apartments instead of living in

their families or investing in

their own houses.

Rent Control: Impacts Supply • Some landowners will have

difficulty earning profits or breaking even at these low rents.

• Fewer newer apartment buildings maybe built.

• Older apartments might be converted into offices, stores, and condominiums.

• This can lead to a shortage of apartments.

Rent Control: Negative Impact • Long waiting lists because of

shortages.

• Discrimination by landlords.

• Lottery system and even bribery

is practiced to allocate the scarce

supply of apartments.

• Buildings can be rundown and

renters may have to wait months

to have routine problems fixed.

Removing Rent Control: o Many renters might have a wider

selection of apartments.

o Landowners will have greater incentive to properly maintain their buildings.

o Invest in new construction.

o It can also cause people who benefited from rent control, no longer able to afford the higher rates.

o These renters can lead them to be priced out of their apartments, and replaced by people willing to pay the equilibrium price.

Discussion Activity

• Do you think the government is

responsible in providing affordable

housing to its citizens?

Price Floors:

• Is a minimum price set by the government that must be paid for a good or service.

• Governments set price floors to ensure that certain sellers receive at least a minimum reward for their efforts.

• Sellers can include workers, who sell their labor.

Minimum Wage: • This is a well-known price floor.

• Which sets a minimum price that an employer can pay a worker for one hour of labor.

• The federal government sets a base level for the minimum wage.

• But states can make their own minimum wages even higher.

• A full-time worker being paid the federal minimum wage will earn less than the federal government says is necessary to support a couple with one child.

Increasing Minimum Wage (Impact)

• If the minimum wage is set above the market equilibrium wage rate, the demand for workers will go down.

• Firms will employ fewer low-skilled workers.

• There will be a surplus of unemployed workers.

• Because the price floor keeps the wage rate artificially high.

Discussion Activity

Do you think it is a good thing to increase

minimum wage to $15.00?

Price Supports in Agriculture: o During the Great Depression, the

Federal Government began setting minimum prices for many commodities.

o Whenever prices fell below a certain level, the government created demand by buying excess crops.

o Supporters of price floors believed that it helped American farmers survive a competitive agriculture market.

o This is to prevent farmers from going out of business and not depend on other nations for the food supply.

Price Supports in Agriculture: • Opponents argued that

regulations were a burden to farmers.

• The government dictated what farmers should produce, and in what quantities.

• Although these laws were meant to be phased out in 1996, but price supports still exist.

• But the earth has blessings hidden in her depths for those who have courage and will and perseverance to gather her treasures. Fathers and mothers who possess a piece of land and a comfortable home are kings and queens. {CL 18.2}

Chapter 6:2: Prices Reaching Equilibrium

• WHAT: Explain why a free market tends to move towards equilibrium.

• WHAT: Explain how market reacts to an increase or decrease in supply.

• WHAT: Explain how a market reacts to an increase or decrease in demand.

• WHY:(12.2 (2) Discuss the effects of changes in supply and/ or demand on the relative scarcity, price, and quantity of particular products.

Psa_119:36 Incline my heart

unto thy testimonies, and not to

covetousness.

New Equilibrium on Supply:

o Different factors can shift a supply curve to the left or to the right.

o These factors include:

o Advances in technology,

o New government taxes.

o Subsidies.

o Changes in the prices of the raw materials and labor used to produce the good.

A Changing Market: • Digital camera debut in 1994 and cost

$749.

• By 2000 consumers could purchase a mid-priced digital camera for $500.

• Just two years later, a similar camera cost $350.

• Now about $100.

• For the same price you can get a DSLR with more features and produces better quality photographs than the original device.

A Changing Market: • Why has this happened?

• Advances in technology have lowered the cost of manufacturing digital cameras by reducing some input costs, such as computer chips.

• Advances in production have allowed manufacturers to produce digital cameras at lower costs.

• The lower costs have been passed down to consumers in the form of lower prices.

Finding a New Equilibrium: • Digital Cameras evolved from an

expensive luxury good to a mid-

priced good when a new

generation of computer chips

reduced the cost of production.

• These lower costs shifted the

supply curve to the right, where,

at each price producers are

willing to supply a larger quantity.

Finding a New Equilibrium:

• Suppliers will respond to a

surplus by reducing prices.

• As the price falls more

consumers buy digital

cameras and the quantity

demanded rises.

• The combining movement of

falling prices and increasing

quantity demanded.

ONLINE ACTIVITY

• Go online and find three items that were

once expensive but now more affordable

due to a new equilibrium of supply. Copy

and paste picture on a document and

explain why this has happened. We will

share in class.

Discussion Activity

• Are you more inclined to get a product

such as electronics when its newly

introduced to the market or are you more

willing to be patient until the price goes

down?

Buy or Wait?

Buy or Wait?

Buy or Wait?

Buy or Wait?

Buy or Wait?

Buy or Wait?

Buy or Wait?

Buy or Wait?

A Decrease in Supply:

• New Technology or lower

costs can shift the supply

curve to the right (increase

supply).

• However, other factors that

reduce supply can shift the

supply curve to the left.

A Decrease in Supply: • Almost every year, we experience a

new fad a product that enjoys enormous popularity for a short time.

• Such as the holiday toy craze.

• Fads reflect the impact of consumer tastes and advertising on consumer behavior.

• Fads like these, in which demand rises quickly are real-life examples of a rapid rightward shift in a market demand curve.

• When fads bring a shortage such as a toy this may result.

A Decrease in Supply: • In the stores that carry the toy, the shortage

appears as empty shelves or long lines.

• Shortage also appears in the form of search costs.

• The financial and opportunity costs that consumers pay in searching for a product or service.

• Driving to or calling different stores to find an available toy are examples of search costs.

• Today, the internet has dramatically reduced search costs for many items.

• But finding the exact product you want can still be a costly and time consuming process.

A Decrease In Demand:

• When a fad passes its peak,

demand can fall as quickly as it

rose.

• The shortage turns into a

surplus for the once-popular

toy as parents look for new,

trendier gifts for their children.

A Decrease In Demand: • When fads go out of style

demand decreases

• New technology can also lead to

a decrease in consumer demand.

• Digital technology has led to a

steep decline in film camera

sales.

• Digital technology also changed

the music industry.

Discussion Activity • In examining your own personal spending

habits and your desires, do you like to purchase something because it is trendy or do you purchase something because its an actual need? If you purchase because of its trendiness, list five trendy products you like to purchase and why.

Chapter 6:3: The Role of Prices

• WHAT: Explain how prices affect consumer behavior and how producers respond.

• WHY:(12.2 (2) Discuss the effects of changes in supply and/ or demand on the relative scarcity, price, and quantity of particular products.

• WHY: 12.2 (8). Explain the role of profit as the incentive to entrepreneurs in a market economy.

• WHY: 12.2 (4). Explain how prices reflect the relative scarcity of goods and services and perform the allocative function in a market economy.

1Co_6:20 For ye are bought with

a price: therefore glorify God in

your body, and in your spirit,

which are God's.

SCARCITY: • People’s needs and wants are unlimited. • When one want is satisfied, others arise. • Goods and services are limited. • No one can have an endless supply of anything. • Sooner or later a limit is always reached. • The fact that limited accounts of goods and

services are available to meet unlimited wants is scarcity.

• Economics is the study of how people seek to satisfy their needs and wants by making choices.

Prices in a Free Market:

• Prices are a key

element of equilibrium.

• Price changes can

move markets toward

equilibrium and solve

problems of shortages

and surplus.

The Advantages of Prices:

• Prices provide a common

language for buyers and

sellers.

• Without prices, as a

standard measure of value,

a seller would have to barter

for goods by trading shoes

or apples for a sweater.

Price as an Incentive. • Buyers and sellers alike look at

prices to find information on a good’s demand and supply.

• The law of supply and the law of demand describe how people and firms respond to change in prices.

• Prices are signals that tell producers or consumers how to adjust.

• Prices communicate to buyers and to sellers whether goods are in short supply or readily available.

Price as an Incentive.

• In the fad toy illustration, the sudden increase for demand for the toy told suppliers that people wanted more of those toys and soon.

• The higher prices tells firms that people want more of the toys (increased demand).

• But also that the firms can earn more profit by producing these toys.

• Therefore the rising prices in a market will provide an incentive for existing firms to produce more of the goods that are in demand (increase supply).

• This will encourage new firms to enter a market.

Prices as Signals:

• Prices acts like a traffic light.

• A relatively high price is a green light that tells producers that a specific product is in demand that they should use their resources to produce more.

• New suppliers will also join the market.

• But a low price is a red light to producers that a good is being overproduced.

Discussion Activity • What are certain products you would like

to purchase but you will not buy due to

price and why?

Flexibility:

• In many markets, prices are much more flexible than output levels.

• Prices can easily be increased to solve a problem of shortage.

• They can just as easily be decreased to eliminate a problem of surplus.

What are the options?

• Increasing supply can be time-consuming and difficult process.

• Rationing, a system of allocating goods and services using criteria other than price is expensive and can take a long time to organize.

What are the options?

• Rationing is the basis of the

economic system known as central

planning.

• Raising prices is the quickest way to

resolve a shortage.

• A quick increase in prices can

reduce quantity demanded to the

same level as quantity supplied and

avoid the problem of distribution.

Discussion Activity • What items do you feel is priority to be

rationed if there is a shortage?

The Black Market: • When people conduct business

without regards for government controls on price or quantity, they are said to do business on the black market.

• Black markets allow consumers to pay more so they can buy a product when rationing makes it otherwise unavailable.

• Although black markets are a nearly inevitable consequence of rationing, such trade is illegal and strongly discouraged by government.

Discussion Activity • Do you think its ok to buy things in the

black market such as counterfeit brand

names? Do you think the Bible will

approve of this?

Price System is Free:

• A free market distribution

system, based on prices, costs

nothing to administer.

• The free market pricing

distributes goods though millions

of decisions made daily by

consumers and suppliers.

• Prices determine if consumers

will buy.

Choice and Efficiency: • One benefit of a market-based economy is the

diversity of goods and services that consumers can buy.

• Prices help consumers choose among similar products.

• The prices provided an easy way for you to narrow your choices to a certain price range.

• Prices also allow producers to target the audience they want with the products that will sell best to the audience.

• In a command economy, one organization decides what goods are produced and how much stores will charge for those goods.

Efficient Resource Allocation: • All of the advantages of a free market

allow prices to allocate, or distribute, resources efficiently.

• Efficient resource allocation means that economic resources land, labor, and capital will be used for their most valuable purposes.

• A market system, with its freely changing prices, ensures that resources go to the use that consumers most highly value.

• Also ensures that resource use will adjust relatively quickly to changing demands of consumers.

Efficient Resource Allocation:

• Producers will seek to sell their resources to the highest bidder.

• The highest bidder will be that firm that produces goods that are in the highest demand.

• Resources will flow to the use that are most highly valued by consumers.

• This flow is the most efficient way to use our society’s scarce resources in a way that benefits both producers and consumers.

Prices and the Profit Incentive:

• Efficient resource allocation goes hand in hand with the profit incentive.

• Heat wave creates need for certain goods (e.g., air conditions & ice cream).

• Rise in prices would have given producers an incentive to meet this need.

• Everyone seeks to gain a profit.

(1) Market Problems: • Imperfect competition can affect prices,

and higher prices can affect consumer decisions.

• If only a few firms are selling a product, there might not be enough competition among sellers to lower the market price down to the cost of production.

• When only one producer sells a good, this producer will usually charge a higher price.

• Than we should see in a market with several competitive businesses.

(2) Market Problems: • Negative externalities such as unintended

costs such as air and water pollution.

• They affect people who have no control over how much of a product is produced or consumed.

• Since producers do not have to pay these unintended costs, their total costs seem artificially low.

• They will produce more than the equilibrium quantity of the good.

• The extra costs will be paid by the consumer, or, in some cases, by society at large.

(3) Market Problems:

• Imperfect information can prevent

a market from operating smoothly.

• If buyers and sellers do not have

enough information to make

informed choices about a product.

• They may not make the choice

that is best for them.

POP QUIZ!!!!!!!!!!

B –Total Cost A –Profit

C –Demand D –Price

What is a key element to equilibrium?

B –Incentive A –Language

C –Signal D –All of the Above

Prices serve as?

B –Bribe A-Scream

C –Barter D –All of the Above

Without prices a buyer may have

to?

B –Traffic Signals A- Mr. Chung

C –Sirens D –All of the Above

Prices act like

• This communicates to buyers and to sellers whether goods are in short supply or readily available.