Market Equilibrium …the point at which the

quantity of a product demanded by consumers in a market equals the quantity supplied by producers

Quantity demanded = Quantity supplied

Balanced!

Bell work How do we find the

equilibrium price?

Reaching Equilibrium The point of intersection

between the supply and demand curves is the point at which the market is at equilibrium.

The price marked by the equilibrium point is the equilibrium price… supply and demand are in balance. This price is also known as

a “market clearing price.” At this price, the market is “cleared” of all surpluses and shortages.

The quantity marked by the equilibrium point is the equilibrium quantity. Amount of the good or service demanded will equal the

amount supplied

What happens when the markets are in balance? Consumers and producers walk away satisfied!

Even though consumers want to pay less and producers want to make more, prices are negotiated (not dictated by only one side).

Negotiations will eventually establish equilibrium price. It is the “right price” for everyone involved.

Negotiation takes time, however… Example: A producer makes a new toy that costs

$100. If consumers feel this price is too high, they will not buy it and the toy will be left on the shelf. Either the producer will lower the price or the item will not be sold. On the other hand, if there is a huge demand, perhaps the price is too low.

JATW

Moving toward the Market Price Market price: the price that a willing consumer plays to

a willing producer for the sale of a good or service. “Governed by the law of supply and demand”

In a competitive free market, supply and demand will work together to create the equilibrium price.

What if the price is NOT right? If a producer sets a price that is above or below the

equilibrium price, this is a state of disequilibrium. Quantity demanded does NOT equal quantity supplied

Surplus Shortage

What happens if the price is too low? Excess demand occurs!

The quantity demanded at a specific price exceeds the supply. A shortage occurs.

Shortage: too many consumers, too few goods

Raising the price will help reach the equilibrium price

What if the price is too high?

Excess supply occurs! The quantity supplied at a

certain price exceeds the quantity demanded

Surplus: Too many goods, not enough buyers

Lowering the price will help reach the equilibrium price.

How do shifts in demand or supply affect markets? Questions to ask:

Does the event affect demand, supply, or both? Does the event shift the demand or supply curve to the

right or to the left? What are the new equilibrium price and quantity, and

how have they changed as a result of the event?

Analyzing the Effect of a Change in Demand on Equilibrium Price Does the event affect

demand, supply, or both? Think back to your

demand shifters… Consumer income Number of consumers Trends Expectations Price of substitute goods Price of complementary

goods

Does the event shift the demand curve to the right or left? Increase- right Decrease- left

Analyzing the Effect of a Change in Demand on Equilibrium Price (cont.) What are the new

equilibrium price and quantity, and how have they changed as a result?

Analyzing the Effect of a Change in Supply on Equilibrium Price

Does the event affect demand, supply, or both? Think back to your

supply shifters… Resource prices (cost of

inputs) Number of producers Technology Producer expectations Government policy Conditions due to

disasters or crises

Does the event shift the demand curve to the right or left? Increase- right Decrease- left

Analyzing the Effect of a Change in Supply on Equilibrium Price (cont.)

What are the new equilibrium price and quantity, and how have they changed as a result?

Analyzing the Effect of Changes in BOTH Supply and Demand There are times when both supply and demand shift. We ask the same three questions…

Do the events affect supply, demand, or both? Do the events shift the demand or supply curve to the

left or the right? What are the new equilibrium price and quantity?

What does this look like?

For example… If we look at the supply

and demand of blueberry smoothies… First event: A bestselling

book calls blueberries a “miracle fruit” that promotes good health.

Second event: A supermarket chain decides to open more juice bars in its stores.

Consumer preference will cause the demand curve to shift to the right. People want more of this miracle fruit!

The number of producers increasing will cause the supply curve to shift right. More producers equals more supply!

Bell Work How do demand or supply shifts affect prices and

quantity supplied/demanded?

What role does price play in a modern mixed economy? Prices convey information to consumers and

producers. Prices create incentives to work and produce. Prices allow markets to respond to the changing

conditions. Prices allocate scarce resources efficiently.

Prices Convey Information to Consumers and Producers. “Prices are like messengers

conveying news.” For the consumer: Signals

the opportunity cost of a product. If the opportunity cost is

low, people do not give much thought to purchasing. If the opportunity cost is high, they will think carefully before spending their money.

Example: buying a pack of gum vs. a television

For the producer: Prices tell what the consumers want and appeals to the consumer. Suppliers look at what sells for a higher price and what

needs to be marked down. This tells them what the consumer’s preferences are.

Different prices are targeted towards different groups of people. The same company may market one item for a lower price towards teens and a higher price for adults.

Incentives to Work and Produce Rising prices represent the potential for profit.

More firms will try to enter the market when prices are higher and existing firms will try to produce more. Example: As home prices increase, firms would build more

houses.

If wages are higher, more people are inclined to enter the workforce than if they were lower.

Market Response to Changing Conditions The market can respond to changes in conditions,

such as natural disasters or war.

Prices Allocate Scarce Resources Efficiently How do we best allocate our

resources? Those products which are in

higher demand will get more resources.

For example: In the dairy industry- the firms whose products (i.e., yogurt, ice cream, cheese) are in highest demand will buy the most milk to meet that demand. Dairy producers will allocate this resource (milk) to its most valued use.

In short… For consumers, prices…

Convey information about products. Signal the opportunity cost of a purchase. Allocate products in short supply to those who value

them the most.

For producers, prices… Signal what consumers want most in a product. Are used to target different markets. Indicate when to increase or decrease production.

For workers, prices… Create incentives to enter the labor force. Signal the level of demand for their skills and work

experience. Inspire search for higher-paying jobs.

Bell Work In what ways do you think the government intervenes

in the economy?

Government Intervention in the Markets Sometimes the

government will put price controls in place if it feels like prices will be too high for consumers or too low for producers. Price controls= limits

on how high or low prices can be

Price floors and price ceilings!

Price floors Price floors: below this price, it is illegal to buy or sell

that good or service Why?

To push prices up to ensure that producers can make a profit

Minimum wage Price floors lead to

excess supply

Price ceilings Price ceiling: maximum price that consumers may be

required to pay for a good or service Above the price ceiling is ILLEGAL! Usually established in response to a crisis (war,

natural disaster, widespread crop failure) Leads to excess demand

Rationing Rationing is the controlled distribution of a good or

service. Examples:

1973 Oil Crisis: gas by license plate number WWII: rationing of goods needed for war effort

Black Market A black market is an illegal market in which goods are

traded at prices or in quantities higher than those set by law. Examples: black market for goods during WWII, buying

organs

Quickwrite Should the government intervene in the economy?

Why or why not?

WRITE A GOOD PARAGRAPH. DON’T BE CHEAP.