CNANGES IN MARKET

EQUILIBRIUMEconomists say that a market will tend toward

equilibrium. Why?There are two forces that can push a market

into disequilibrium:A shift in demandA shift in supply

CHANGE IN PRICE A shift of the supply curve will change the

equilibrium price and quantity. Shift in supply is caused by many factors technology, taxes, subsidies, price of raw

materials, and labor

SHIFTS IN DEMAND An increase in market demand will affect

the equilibrium in that market. Shifts in demand cause problems

Shortages Search costs

Excess supply

THE ROLE OF PRICES Prices are a key element of equilibrium.

Price changes can move markets back toward equilibrium and solve the problem of excess demand and excess supply.

Prices in a free market are a tool to distribute goods and resources

PRICES IN THE FREE MARKET Prices serve a vital role in a free market

economy. Prices help move land, labor, and capital into

the hands of producers. They help put finished goods into the hands of

consumers.

ADVANTAGES OF PRICES Prices provide a language for buyers and

sellers. Without them a supplier would have no consistent and accurate way to measure demand for a good. Price as an incentive

Both buyers and sellers look at prices to find information on a goods demand and supply

Prices are a signal that tell a consumer or producer how to adjust

Prices communicate to both buyers and sellers whether a good is in short supply or readily available.

ADVANTAGES OF PRICES CONT. Prices as Signals

High prices are a signal to producers that a good is in demand and that they should produce more

Low prices are a signal to producers that a good is being overproduced and that they should use there resources to produce another good that would make them more profits.

Low prices tell consumers to buy more low opportunity cost

High prices tell consumers to buy less

ADVANTAGES OF PRICE CONT. Flexibility

When supply or demand shifts the equilibrium in that market is changed and quantity supplied and price need to change to rebalance the market.

Prices are easily increased or decreased to solve excess demand or excess supply.

Output levels are not flexible Supply shock sudden shortage Rationing

ADVANTAGES OF PRICES CONT PRICE SYSTEM IS “FREE”

Distribution of goods in a free market system based on prices costs nothing to administer unlike a centrally planned economy.

Free market system pricing distributes goods through millions of decisions made every day by producers and consumers.

WIDE CHOICE OF GOODS A benefit of a market-based economy is

the diversity of goods and services a consumer can buy. Prices give producers a way to allow

consumers to choose similar products Prices provide an easy way for a consumer to

narrow their choices to a certain price range Prices allow producers to target the audience

they want with the products that will sell the best to that group.

WIDE CHOICE OF GOODS CONT. Rationing

Government controls the distribution of goods Why do it?

Shortages Black Market

When people do business without regard for government controls on price of quantity.

It allows consumers to pay more so they can buy a good when rationing makes a good otherwise unavailable.

EFFICIENT RESOURCE ALLOCATION All of the advantages of a free market system

allows prices to allocate resources efficiently. The 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 uses that consumers value most.

A price based system also ensures that resources use will adjust to the changing demands of consumers.

All of these changes take place without any government control because people who own the resources look for the largest profit. How do people who earn the largest profit?

PRICES AND THE PROFIT INCENTIVE What would happen if a hot summer was

predicted? What would consumers do? What would power companies do? What would happen to prices? What would producers do?

The rise in prices would have given the incentive to producers to meet these needs

THE WEALTH OF NATIONS Adam Smith explained that producers do not

provide goods because of charity but instead they provide goods because prices are such that they will profit by provide those goods.

Market Problems There are some exceptions to the idea that markets lead

to an efficient allocation of resources. Imperfect competition it can affect prices and higher prices

affect consumer decisions (few producers not enough competition higher prices)

Spillover costs (externalities) Producers do not pay these cost so they will produce more than the equilibrium quantity. Extra cost past on to consumer

Imperfect information if buyers and sellers do not have enough information to make informed choices about a product leads to bad choices.