Markets & Prices Markets & Prices

What If The Price Is Too High

sellers have incentive to produce a lot buyers have incentive to consume a little excess supply (surplus) competition among sellers: P ↓ weeds out extra sellers, attracts additional buyers

Excess Supply Excess Supply

Price ofIce-Cream

ConeSupplySupply

DemandDemand

QuantitydemandedQuantitydemanded

QuantitysuppliedQuantitysupplied

SurplusSurplusSurplus

Quantity ofIce-Cream

Cones

44

$2.50

10

$2.50

10

2.00

7

2.00

7

Markets & Prices Markets & Prices

What If The Price Is Too Low

buyers have incentive to consume a lot sellers have incentive to produce a little excess demand (shortage) competition among buyers: P ↑ weeds out extra buyers, attracts additional sellers

Excess Demand Excess Demand

Price ofIce-Cream

Cone

Quantity ofIce-Cream

Cones

SupplySupply

DemandDemand

QuantitysuppliedQuantitysupplied

QuantitydemandedQuantitydemanded

1.50

10

1.50

10

$2.00

7

$2.00

744

ShortageShortageShortage

Gains From Trade Gains From Trade

Opportunity For Improvement

should a particular unit of a good be produced and consumed?

only if market participants can benefit from exchange

as long as someone is willing to pay more than it would cost a firm to produce the unit, then there are incentives to enter into the transaction

Gains From trade Gains From trade

Quantity

PriceSupplySupply

DemandDemand

Costto

sellers

Costto

sellers

Costto

sellers

Costto

sellers

Valueto

buyers

Valueto

buyers

Valueto

buyers

ValueValueto

buyers

Value to buyers is greaterthan cost to sellers.Value to buyers is greaterthan cost to sellers.

Value to buyers is lessthan cost to sellers.Value to buyers is lessthan cost to sellers.

Equilibriumquantity

Equilibriumquantity

Markets & Competition FTE Markets & Competition FTE

Competition Regulates Markets

buyers and sellers both gain from exchange prices adjust to encourage trade competition directs goods & services (resources)

to their most highly-valued uses

Shocks Shocks

What If Market Conditions Change suppose something other than the price of a good changes

– price of inputs, technology– income, price of other goods, tastes & preferences

a change in market conditions will create a disequilibrium the price adjusts to bring the quantity supplied and the

quantity demanded into balance

Shocks Shocks

Three Steps

does the event shift the supply curve or demand curve to the left or to the right

use the S & D diagram to see how the shift affects the equilibrium price and quantity

Increase In Demand Increase In Demand

Price ofIce-Cream

Cone

Quantity of Ice-Cream Cones

SupplySupply

Initialequilibrium

Initialequilibrium

DD

DD

3. . . . and a higherquantity sold.3. . . . and a higherquantity sold.

2. . . . resultingin a higherprice . . .

2. . . . resultingin a higherprice . . .

2. . . . resultingin a higherprice . . .

1. Hot weather increasesthe demand for ice cream . . .1. Hot weather increasesthe demand for ice cream . . .

2.00

7

2.00

7

New equilibrium$2.50

10

New equilibrium$2.50

10

$2.50

10

Increase In Demand Increase In Demand

Hot Weather

increased tastes & preferences demand curve shifts to the right shortage at initial equilibrium price P ↑ to restore equilibrium new equilibrium: higher P higher Q

Factors That Shift Demand Factors That Shift Demand

Factors That Shift Demand Factors That Shift Demand

Recall…..

if more people want a particular productD ↑ leads to P ↑

sends signal to producers that more is desired sellers respond to incentive of higher prices

ethanol and corn bellbottoms are all the rage this year cowbells?

Decrease In Supply Decrease In Supply

Price ofIce-Cream

Cone

Quantity of Ice-Cream Cones

DemandDemand

Newequilibrium

Newequilibrium

Initial equilibrium

S1S1

S2S2

2. . . . resultingin a higherprice of icecream . . .

2. . . . resultingin a higherprice of icecream . . .

2. . . . resultingin a higherprice of icecream . . .

2. . . . resultingin a higherprice of icecream . . .

1. An increase in theprice of sugar reducesthe supply of ice cream. . .

1. An increase in theprice of sugar reducesthe supply of ice cream. . .

3. . . . and a lowerquantity sold.3. . . . and a lowerquantity sold.

2.00

7

2.00

7

$2.50

4

$2.50

4

Decrease In Supply Decrease In Supply

Price Of Sugar Rises

increased price of input supply curve shifts to the left shortage at initial equilibrium price P ↑ to restore equilibrium new equilibrium: higher P lower Q

Factors That Shift Supply Factors That Shift Supply

Shocks Shocks

What Happens to Price and Quantity When Supply or Demand Shifts?

Efficiency Efficiency

The Invisible Hand

guides decision-making rewards efficient producers and consumers goods society wants prices society is willing and able to pay

Equilibrium Equilibrium

Price ofIce-Cream

Cone

1 2 3 4 5 6 7 8 9 10 11 12Quantity of Ice-Cream Cones

13

EquilibriumquantityEquilibriumquantityEquilibriumquantity

Equilibrium priceEquilibrium price EquilibriumEquilibrium

SupplySupply

DemandDemand

$2.00$2.00

University of Wisconsin-Eau ClaireUniversity of Wisconsin-Eau Claire Markets in Action: Application 1 Markets in Action: Application 1

Two Sources Of Seasonal Variation

beachfront cottages apples

identify period of highest consumption will price be high or low?

University of Wisconsin-Eau ClaireUniversity of Wisconsin-Eau Claire Markets in Action: Application 1 Markets in Action: Application 1

Two Sources of Seasonal Variation

University of Wisconsin-Eau ClaireUniversity of Wisconsin-Eau Claire Markets in Action: Application 2 Markets in Action: Application 2

Corn and Beef

D for corn (ethanol) has led to P corn is main feed for cattle (used to produce beef) What happens in the market for beef?

Atkin’s Diet has people wanting more beef…..

Mad Cow scare in Nebraska meat plant…..

University of Wisconsin-Eau ClaireUniversity of Wisconsin-Eau Claire Markets in Action: Application 3 Markets in Action: Application 3

Nursing Shortage

nursing is traditionally a women’s occupation new higher paying job opportunities for women What happens in the market for nurses?

an aging population has led to D for medical services…

apply similar analysis to teachers, truck drivers…

University of Wisconsin-Eau ClaireUniversity of Wisconsin-Eau Claire Markets in Action: Application 4 Markets in Action: Application 4

Taxes, Markets & Government Revenue

$1 tax on each unit sold in the marketplace

How successful will this be in gasoline market?

How successful will this be in the cigarette market?

now consider the market for footwear…– black Converse Chuck Taylor high-tops…

University of Wisconsin-Eau ClaireUniversity of Wisconsin-Eau ClaireMarkets in Action: Other QuestionsMarkets in Action: Other Questions

Why do houses ↑ in price after purchase, while automobiles ↓ in price after purchase?

How do consumers respond to price changes?– salt, public transportation, gasoline (what’s up with gas prices)

If there are more cranberries, how come the price is higher?

Why is there currently a shortage of nurses and truck drivers