Changes in Market Equilibrium Chapter 6 Section 2

Changes in Market Equilibrium Chapter 6, Section 2

Changes in Market Equilibrium �When the supply or the demand curve shifts, a new equilibrium occurs. �Then, the market price and quantity sold move toward the new equilibrium.

Excess Demand �Excess demand leads firms to raise prices �Higher prices lead to more quantity supplied �The quantity demanded falls until the two values (price and quantity demanded) are equal

Excess Supply �Excess supply will force firms to cut prices. �Falling prices will cause quantity demanded to rise and quantity supplied to fall until they are equal.

Changes in Prices �Factors that shift the supply curve to the left or right include: • Advances in technology • New government taxes / subsidies • Changes in price of raw material / labor

Changes in Prices �Equilibrium occurs at the intersection of the demand curve and supply curve. �Therefore, • A shift in the demand curve or the supply curve will change the equilibrium price. • A functioning market will carefully balance supply and demand.

Chapter 6, Section 3: Roles of Prices �In a free market, prices are a tool for distributing goods and resources throughout the economy. �Price is a language both sellers and buyers understand. It is a way of putting a standard measure of value on a good or service.

Roles of Prices, cont. �Prices give the consumers and producers incentives. • When prices are low, the consumer has the incentive to buy more. • When prices are high, the producer has the incentive to produce more.

Roles of Prices, cont. �Prices are very flexible and can easily be changed to solve the problem of excess demand or excess supply. • Prices can be raised to solve the problem of excess demand. • Prices can be lowered to solve the problem of excess supply.

Supply Shock �Supply shock is a sudden shortage of a good. Suppliers can no longer meet the needs of consumers. �Solution 1: Increase supply -- the problem is it might take some time. �Solution 2: Rationing – Dividing up goods or services and distributing them using criteria other than price. This might also take time.

Wide Choice of Goods �One benefit of a market- based economy is the diversity of goods and services consumers can buy. �Price allows the consumers to choose among similar goods.

The Black Market �The Black Market is a market in which goods and services are sold illegally. • Usually a consequence of rationing. • Consumers pay more so they can buy a good when rationing makes it otherwise unavailable. • The Black Market can also allow consumers to buy goods cheaper because there are no government taxes on these goods.

Efficient Resource Allocation �A free market allows resources to be utilized efficiently. �Land, labor and capital will be used for their most valuable purposes.

Market Problems � Imperfect Competition: Only a few firms providing a good or service � Spillover Costs (Externalities): Costs of production • Air pollution • Water pollution � Imperfect Information: Consumers and/or producers do not have enough information to make informed choices about a product • Buying a car