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3.5 Market-Clearing Price

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Greg Caskey

on 24 October 2016

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Transcript of 3.5 Market-Clearing Price

3.5 Equilibrium Price
Elastic or Inelastic Supply?
Fine Paintings
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?
Demand and Supply together
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.
Seems like a problem at first...
Equilibrium Price: The price at which Qty supplied= Qty demanded
The "Market-Clearing Price" (MCP)
It is correct to say that SUPPLY=DEMAND at the market-clearing price???
At Equilibrium, Supply IS NOT equal to Demand!!
If this 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-Clearing Price
Market Shortage
Market Surplus
SURPLUS- A situation where quantity supplied exceeds quantity demanded at a given price
Causes sellers to compete more intensely!
When this occurs, prices begin to fall, causing sellers to reduce qty supplied.

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??
The price at which qty supplied = qty demanded
Does the MCP leave everyone satisfied? NO!
Only buyers/sellers that are W/A to buy/sell at MCP are satisfied.
Sellers who want to sell at a higher price than MCP= unsatisfied
Buyers who want to buy at lower price than MCP= unsatisfied
Prices tend to be close to or moving toward the MCP
Market Competition tends to move prices toward MCPs
SHORTAGE- A situation in which qty. demanded exceeds qty. supplied
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, 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
In the first graph, the dashed green line represents a price floor set below the free-market price.
In this case, the floor has no practical effect. The government has mandated a minimum price, but the market already bears a higher price.

In the second graph, An effective, binding price floor, causes a surplus
In the second graph, the dashed green line represents a price floor set above the free-market price.
In this case, the price floor has a measurable impact on the market. It ensures prices stay high so that product can continue to be made.
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
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.
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