Chapter 6 discusses how market prices are determined through consumer and producer interactions, leading to equilibrium. It explains the concepts of surplus and shortage when prices are not at equilibrium and how shifts in demand and supply affect prices. Additionally, it addresses government interventions like price floors and ceilings, and the emergence of black markets in response to such controls.
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Chapter 6 discusses how market prices are determined through consumer and producer interactions, leading to equilibrium. It explains the concepts of surplus and shortage when prices are not at equilibrium and how shifts in demand and supply affect prices. Additionally, it addresses government interventions like price floors and ceilings, and the emergence of black markets in response to such controls.
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Chapter 6
Prices Bring Markets to Balance
Market Price: The price that willing consumers pay to a willing producer for the sale of a good or service.
• Market Price is found by looking at consumer and producer interactions.
• Consumers send signals to producers about whether a product is priced too high or too low by how much they buy of that product. What Happens When the Price isn’t “Right”? Disequilibrium: Formed when Surplus market price is set above or below the equilibrium price ● Leads to excess demand or excess supply Excess Supply – Supply exceeds demand. Price is too high Excess Demand – Demand exceeds supply. Price too low
would need to go down Excess Demand ---> Shortages Excess demand
• To get back to equilibrium, price
would need to rise What are the 3 questions that need to be asked to figure out the changes in equilibrium prices?
• Does the event affect demand, supply, or both?
• Does the event shift the demand or supply curve to the right or left? • What is the new equilibrium price and quantity? -How have they changed as a result of the event? How Price is Affected by Demand Shift How does the price get affected when demand shifts? Demand increases & Price increases • Assume supplier increase supply or there would be a shortage
Demand decreases & Price decreases
• Assume supplier decreases supply or there would be a surplus How Price is Affected by Supply Shift
How does the price get affected when supply
shifts? Supply increases & Price decreases • Assume consumers buy more or there would be a surplus
Supply decreases & Price increases
• Assume consumers buy less or there would be a shortage What if both demand & supply shift? What do the demand & supply shifts tell us about the market? Changes in prices …. ● Tells producers how much to produce ● Tells producers how much to charge ● Shows buyer’s interest (demand) for a product What Happens when the Government is Involved?
• The government will get involved
when it believes prices are too low.
Government affects prices:
Price Floor = setting a MINIMUM price
Example: minimum wage
• It can be difficult to stop government
interference due to political influences from those who it benefits. What Happens when the Government is Involved?
• The government will get involved
when it believes prices are too high.
Government affects prices:
Price Ceilings = setting a MAX price
Example: Rent Control for Apartments
• It can be difficult to stop government
interference due to political influences from those who it benefits. Black Markets Black markets: an illegal market where goods are traded at prices or quantities higher than those set by law.
• They are usually created in response to government controls that can