Markets, Equilibrium, and PricesHow do you know when the price is “right”?

Demand Meets Supply

Market Equilibriummarket

equilibrium: the point at which the quantity of goods or services that consumers are willing and able to buy equals the quantity that producers are willing and able to sell.

Market Equilibrium

MELONS!$6.50 EACH!

LULZ YOU

WISH!

FARMERS MARKET!

MELONS!$6.00 EACH!

MEH, ONE

PLEASE

THE NEXT DAY...

MELONS!$5.00 EACH!

I WILL TAKE

FOUR!

THE NEXT DAY...

GREAT SUCCESS

!

MELONS!$4.00 EACH!

THE NEXT DAY...I WILL TWO

LOADS!

THE NEXT DAY...

EHRM… I JUST HAVE ONE

LOAD…

Equilibrium Price

The equilibrium price is the price marked by the equilibrium point on the supply and demand graph. This is also known as the market-clearing price because at this price, the market will be “cleared” of all surpluses and shortages.

Equilibrium Quantity

The equilibrium quantity is the quantity marked by the equilibrium point on the supply and demand graph.

A Balancing ActPrice move to bring markets into

balance.The farmers market example is a

simplified version of what takes place in larger, broader markets.

Consumers and producers send each other numerous “trial and error” messages.

A Balancing Act - ExampleA grocery chain

opens up that specializes in organic products, which tend to cost more. If few customers show up at the beginning, it may be a good indication that items are too expensive.

A Balancing ActA smart business will respond to

market trends, and adjust prices accordingly.

The interaction between consumers and producers automatically pushes the market price of a good or service toward the equilibrium price.

DisequilibriumWhat happens when the price isn’t

“right”?

When producers set a market price that is above or below the equilibrium price, this creates a state of disequilibrium. ◦The result is either a shortage or a

surplus.

When Prices Are Too LowWhat happens when the price is too low (below the

point of market equilibrium)?There is a shortage – because there won’t be

enough of a good/service to meet the quantity demand.

When Prices Are Too Low

When Prices Are Too LowWhen prices are too low, there is

excess demand – the quantity demanded exceeds the quantity supplied. This results in a shortage.

Imagine if Apple decided to sell the next generation iPad for just $10. Describe the scene at retailers nationwide on release day.

iPad 9 Launches at $10!

When Prices Are Too HighWhat happens

when the price is too high (above the point of market equilibrium)?

There is a surplus – because there won’t be enough buyers willing and able to pay that price for the available good/service.

When Prices Are Too High

When Prices Are Too HighWhen prices are too high, there is

excess supply – the quantity supplied exceeds the quantity demanded. This results in a surplus.

Imagine if Chipotle raised the price of its burritos to $60.

At least you wouldn’t have to wait a fortnight in line.

Prices in a Modern Mixed Economy

Prices convey information to consumers and producers.

In this sense, they are like messengers.

Prices in a Modern Mixed Economy

Messengers to Consumers:◦The high price of Manhattan real

estate says “this stuff is in short supply!”

◦The low price of rubber flip flops says “there are a lot more where these came from!”

◦The prices of big ticket items like flat screen TVs tell consumers “you should do your homework and shop around for the best deal, or you could be wasting some of your hard-earned money.”

Prices in a Modern Mixed Economy

Messengers to Producers:◦Items that sell for high prices say

“you should consider making more things like this!”

◦Items that have to end up marked down in price say “yea, this was a dud – probably shouldn’t make more of this.”

Prices in a Modern Mixed Economy

Prices create incentives to work and produce.

For even when we were with you, we would give you this command: If anyone is not willing to work, let him not eat. (2 Thess. 3:10)

Prices in a Modern Mixed Economy

Rising prices encourage existing producers to produce more, and draw in new producers because there is money to be made.

Falling prices cause some producers to exit the market, and others to cut back on production and costs, including jobs.

Higher wages encourage workers to seek better paying jobs, while low wages discourage work.

Prices in a Modern Mixed Economy

Prices allow markets to respond to changing conditions.◦Prices allow markets to adjust quickly

when major events such as wars and natural disasters interfere with the production or movement of goods, wreaking havoc on supply.

◦For example, when Hurricane Katrina hit and disabled some of the U.S. oil production, prices went up accordingly. They eventually came back down once production was restored.

Prices in a Modern Mixed Economy

Prices allocate scarce resources efficiently.◦Perhaps most

important in a market economy, prices guide resources to their most efficient uses.

◦You COULD use a gold bar as a doorstop.

◦OR you could turn it into fine jewelry and sell it for a large profit.

Government InterventionsOccasionally, governments will

intervene in a market in an attempt to influence prices with limits called price controls.

They do this when they are persuaded that supply and demand will result in prices that are unfairly high for consumers, or unfairly low for producers.

Government InterventionsPrice floors are minimum prices

established to keep prices from going too low. Prices below the floor are illegal.

One example: if the equilibrium price of wheat drops too low, many farmers will be unable to make enough money to cover their costs, and go into debt. To protect farmers, government could set a price floor.

Government InterventionsThe minimum wage is another

example of a price floor, since it affects the price that employers pay for labor.◦In some markets, where workers

outnumber jobs, the equilibrium wage could be driven so low that even full-time workers would not make enough money to survive.

◦What downside(s) might imposing a minimum wage create, though?

Minimum Wage Effects?

Government InterventionsPrice ceilings are maximum

prices established to keep prices from going too high. Prices above the floor are illegal.

Governments will occasionally impose price ceilings in response to natural disasters, to ensure that necessities remain affordable.

Government InterventionsThe best-known form of price

ceilings in the US today is rent control.

Rent control regulations make it illegal to charge more than a specified monthly amount for rental housing.◦Introduced in New York City after

WWII to protect poor families, but still around today.

◦What potential downside(s) might there be to imposing rent control?

The first night Felice Cohen, 39, slept in her tiny apartment — with a full-size loft bed only 23 inches from the ceiling — she had a “panic

attack.”“But now I love it. It’s cozy,” she said of the 12-by-7-foot place, which

rents for just over $700 a month.Her tiny bathroom is a challenge, though: “I had to learn to sit

sideways on the toilet so I don’t bang my leg on the tub.”

Excess Supply & DemandWhen price

ceilings result in shortages, governments may impose rationing – the controlled distribution of a limited supply good or service

Excess Supply & DemandShortages – even

when there is rationing – can result in black markets. Here, goods/services are sold in greater quantities and at higher prices than legally allowed.

Why Not Just End

Price Controls?

In a Word,

Politics