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3.5 Market-Clearing Price

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Greg Caskey

on 10 March 2017

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Transcript of 3.5 Market-Clearing Price

3.5 Equilibrium Price
Elastic or Inelastic Supply?
Cookies
Airplanes
Fine Paintings
T-Shirts
Gasoline
Essential Questions
How do competitive markets "clear" the amount buyers want to purchase with the amount sellers want to sell?
What are shortages and surpluses, and how does market competition eliminate them?
How do market-clearing prices send signals to buyers and sellers?
How do market-clearing prices ration goods and services?
How do market-clearing prices motivate people to produce G/S?
How do changes in demand and supply bring about changes in market-clearing prices?
Equilibrium Price
QUESTION:
It is correct to say that SUPPLY=DEMAND at the equilibrium price???
At the EQ, Supply IS NOT equal to Demand!!
At E.P., QTY SUPPLIED= QTY DEMANDED

If SUPPLY= DEMAND were the case:
Consumers would want to increase their quantity demanded as sellers raised their prices, or
Sellers would want to increase their quantity supplied as buyers demanded lower prices.
Supply and Demand would be the same line, and the Law of Demand/Law of Supply would be the same thing!


Market Shortage
Market Surplus
SURPLUS- A situation where quantity supplied exceeds quantity demanded at a given price
Occurs when PRICE IS ABOVE EQ
Causes sellers to compete more intensely!

Price Floor: A gov't imposed lowest legal price that can be charged for a product
Ex: Min. Wage laws, Price Supports for Farmers
Can there be a surplus of something scarce?
Statement sounds like a contradiction...
In everyday conversation, surplus likely means that sellers are offering more of something than people WANT

To economists, it means that people don't WANT to buy all the G/S that sellers want to sell at the existing price.
DEMANDS are WANTS backed by being W/A to pay for the G/S.
At a surplus, consumers buy less than they want, and less than sellers want to sell.
What raises oil prices?
What raises oil prices?
Demand and Supply Activity Worksheet
What is Driving Oil Prices??
Market Competition tends to move prices toward the EQ.
SHORTAGE- A situation in which qty. demanded exceeds qty. supplied
Occurs when PRICE IS BELOW EQ
Causes buyers to compete more intensely!

Price Ceiling: a gov't-imposed maximum legal price that can be charged for a product
Ex: Rent Control laws , Anti-Price Gouging laws

Rent Control Debate
An example of a price floor is minimum wage laws;
In this case, employees are the suppliers of labor and the company is the consumer.
When the minimum wage is set above the equilibrium market price for unskilled labor, unemployment may be created (more people are looking for jobs than there are jobs available
Relate these two images:
Mystery Guest:
Born in Philadelphia, Pennsylvania,
Holds a B.A. in economics from California State University, Los Angeles
M.A. and Ph.D. degrees in economics from UCLA.
He also holds a Doctor of Humane Letters from Virginia Union University and Grove City College
Doctor of Laws from Washington and Jefferson College
Doctor Honoris Causa en Ciencias Sociales from Universidad Francisco Marroquin, in Guatemala, where he is also Professor Honorario.

At George Mason University in Fairfax, Virginia, he is the John M. Olin Distinguished Professor of Economics, since 1980; from 1995 to 2001, He served as department chairman.
He has also served on the faculties of Los Angeles City College, California State University Los Angeles, and Temple University in Philadelphia, and Grove City College, Grove City, Pa.

He is the author of over 150 publications which have appeared in scholarly journals such as Economic Inquiry, American Economic Review, Georgia Law Review, Journal of Labor Economics, Social Science Quarterly, and Cornell Journal of Law and Public Policy and popular publications such as Newsweek, Ideas on Liberty, National Review, Reader's Digest, Cato Journal, and Policy Review.

He has authored ten books: America: A Minority Viewpoint, The State Against Blacks, which was later made into the PBS documentary "Good Intentions," All It Takes Is Guts, South Africa's War Against Capitalism, which was later revised for South African publication, Do the Right Thing: The People's Economist Speaks, More Liberty Means Less Government, Liberty vs. the Tyranny of Socialism, Up From The Projects: An Autobiography, and Race and Economics: How Much Can Be Blamed On Discrimination? American Contempt for Liberty (forthcoming Spring 2015).

He has made scores of radio and television appearances which include "Nightline," "Firing Line," "Face the Nation," Milton Friedman's "Free To Choose," "Crossfire," "MacNeil/Lehrer," "Wall Street Week" and was a regular commentator for "Nightly Business Report." He is also occasional substitute host for the "Rush Limbaugh" show.
In addition, he writes a nationally syndicated weekly column that is carried by approximately 140 newspapers and several web sites. His most recent documentary is “Suffer No Fools,” shown on PBS stations Fall/Spring 2014/2015, based on Up from the Projects: An Autobiography.

He has received numerous fellowships and awards including: the Fund for American Studies David Jones Lifetime Achievement Award, Foundation for Economic Education Adam Smith Award, Hoover Institution National Fellow, Ford Foundation Fellow, Valley Forge Freedoms Foundation George Washington Medal of Honor, Veterans of Foreign Wars U.S. News Media Award, Adam Smith Award, California State University Distinguished Alumnus Award, George Mason University Faculty Member of the Year, and Alpha Kappa Psi Award.

Dr. Walter E. Williams
Price Ceiling and Price Floors
Rent Control in Seinfeld
http://yadayadayadaecon.com/clip/12/
Jerry lives in a rent controlled building. The only time an apartment opens up is when Mrs. Hudwalker dies, because rent controls create immobility. Elaine and Jerry find out about the opening, and because Elaine happens to be first in line, she gets it for $400 per month. Subsequently, Jerry gets worried about having Elaine living so close, and tells Elaine that she can't have the apartment--the super was offered a $5,000 bribe.
http://yadayadayadaecon.com/clip/6/
Price Gouging
After a disaster, is it immoral to raise prices on goods that people need?
Equilibrium Price (EQ.): The price at which Qty supplied= Qty demanded
AKA: The "Market-Clearing Price" (MCP)

When prices go up, sellers want to sell more, buyers want to buy less.
When prices go down, buyers want to buy more, sellers want to sell less.


Do buyers compete against sellers?
Video clip: The Equilibrium Price
Explain:
"At any other price than the Equilibrium Price, the incentives of the buyers and sellers push the price towards the equilibrium price."
Sellers who want to sell at a higher price than MCP= unsatisfied
Buyers who want to buy at lower price than MCP= unsatisfied
A history of Minimum Wage laws
Economist Thomas Leonard, Princeton University
Minimum Wage example:
The parable of the fat old, ugly cigar smoking man and the beautiful young lady
Full transcript