Economics ch 6

Topics: Supply and demand, Pricing, Competition Pages: 5 (1259 words) Published: April 6, 2014
Chapter 6
Balancing the Market
The point at which quantity supplied come together is known as Equilibrium Market Disequilibrium
If the market place or quantity supplied is anywhere but at the equilibrium price, the market is in a state called disequilibrium Excess Demand
Occurs when quantity demand is more than quantity supplied
Excess Supply
Occurs when quantity supplied exceeds quantity demand
The interaction between buyers and sellers (Market Forces) will always push the market back toward equilibrium Price Ceilings
In some cases the government steps in to control prices. These intervention appear as price ceilings and price floor Price Ceiling is a maximum price that can be legally charged for a good, to keep them from coming too expensive Ex. Rent control

reduces quantity and quality of houses
Helps some, harms others
If the price ceiling is too low, demand will increase but supply while likely from Long waiting list, bribery and discrimination
Price Floor
A minimum price, set by the government, that must be paid for a good or services Federal government sets base min. wage
States can set their own higher
The minimum wage os set above the market equilibrium wage rate, the results is a decrease in employment or an excess supply of labor Price floor are used for many farm products around the world When the price dropped, the U.S gov. created by buying excess crops In 1996- US abolished these programs and instead offers farmers emergency financial aid when need Shift in supply

Understanding a shift
Since market tend toward equilibrium, a change in supply will set market force in motion that lead the market to a new equilibrium price and quantity sold Excess Supply
A surplus is a situation in which quantity supplied is greater than quantity demanded. If a surplus occurs, produces reduce prices to sell their products. This creates new market Equilibrium A Fall in Supply

The exact opposite will occur when supply is decreased. As supply decreases producers will raise there prices Shift in demand
Excess Demand
A shortage is a situation in which quantity demands greater than quantity supplied. Search Cost
Search cost are financial and opportunity cost consumers pay when searching for a good or service. Fall in demand
When demand falls, suppliers respond by cutting prices, and a new market equilibrium is found The Role of Prices in a Free Market
Prices serve a vital role in a Free Market Economy
Prices help move land, Labor and capital into the hand of producers, and finished goods in to the hand of buyers Prices create efficient resources allocation for producers and a language that both the consumer and producers can use Advantages of Prices

Price provide a language for buyers and sellers
Prices as an Incentive
Prices communicate to both buyers and sellers whether goods and services and scarce or easily available. Prices can encourage or discourage production. Signals
Think of prices as a traffic light. A relatively high price is a green light telling producers to make more. A Relatively low price is a red light telling producers to make less Flexibility
In many markets, prices are much more flexible than production levels. They can be increased or decrease to solve problems of excess supply or demand Supply Shock- A sudden change in supply EX gas after hurricane Price system is free

Unlike Central Planning, a distribution system based on prices costs nothing to Wide Choices of Goods
Benefits of a market based economy: Diversity of goods and services Command economies like that of china or the former USSR usually restrict production to limit costs Rationing
During WW2, the U.s. was forced to institute prices controls and rationing in order to ensure that certain items did not become to expensive for the average Americans. as might have happened with the prices- based systems Rationing does mean that a certain goods won’t always be available The Black Market

A market where things are...
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