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Demand, Supply, and Prices

Economics

Chapter 6

Seeking Equilibrium: Demand and Supply

The Interaction of Supply and Demand

Market Equilibrium - a situation in which the quantity demanded of a good or service at a particular price is equal to the quantity supplied at that price.

Equilibrium Price

The price at which the quantity of a product demanded by consumers and the quantity supplied by producers are equal.

Equilibrium Price

Example

Karen's Sandwich Shop

Example

DAY 1

Karen prepares 40 salads (supply)

She is selling each salad for $10 (price)

She only sells 10 salads (demand)

40 -10 = 30 salads wasted

Day 2

Karen prepares 15 salads (supply)

She is selling each salad for $4 (price)

She discovers 35 want salads (demand)

15 - 35 = -20 profit lost

Continued

Day 3

Karen makes 35 salads (supply)

She charges $8 a salad (price)

15 costumers want salad (demand)

35 - 15 = 20 salads thrown out

Day 4

Karen makes 25 salads (supply)

She charges $6 a salad (price)

25 costumers want salad (demand)

25 - 25 = 0 EQUILIBRIUM!!

Continued

Supply/Demand Curve

0 10 20 30 40 50

Quantity of Salads

Reading the Graph

When there is a decrease in demand, the demand curve shifts to the left.

When there is an increase in demand, the demand curve shirts to the right.

Reading the Graph

Reaching Equilibrium Price

Surplus- quantity supplied is greater than the quantity demanded. This usually happens because prices are to high.

Shortage- the result of quantity demanded being greater than quantity supplied. This usually happens because prices are to low.

Equilibrium

Equilibrium price is the price at which the quantity demanded equals the quantity supplied.

How the Price System Works

Prices as Signals and Incentives

The more producers there are in a market, the more supply there is. This increases competition and lowers the equilibrium price.

Competitive pricing occurs when producers sell goods and services at prices that best balance the twin desires of making the highest profit and luring customers away from rival producers.

The Price System

1. It is neutral- the prices neither favor the producer nor the consumer.

2. It is market driven- Market forces, not a centralized power determine prices.

3. It is Flexible- when conditions change, so do prices.

4. It is efficient- Prices will adjust until the maximum number of goods and services are sold.

Characteristics

Chart

Prices Motivate Everyone

Incentive- a way to encourage people to take a certain action.

Prices Motivate

Producers

For producers, the price system has two great advantages:

The price system provides both information and motivation.

Information- whether it is a good time to enter or leave a particular market.

Motivation- if the prices rise, enter the market to make money. If the prices fall, leave the market so to not lose money.

Consumers

Prices act as signals and incentives for consumers too.

Surpluses lead to lower prices and let consumers know it is a good time to buy a certain product.

High prices discourage consumers from buying a particular product and may signal it is time to search for an alternative product because it has a high status.

Michael Dell

Dell began assembling and selling computers as a freshman in college in 1984. He quickly made $6 million in his first year.

He was successful because he bypassed the computer retailers and sold his over the telephone directly to consumers.

Michael Dell

Crash Course

TOPIC 3

Intervention in the Price System

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