ECONOMICS SurplusShortage Equilibrium Price and Price CeilingsFloors HOW
ECONOMICS Surplus/Shortage, Equilibrium Price and Price Ceilings/Floors
HOW PRICES ARE DETERMINED n Equilibrium Price: Price where demand EQUALS supply Also called “Market Clearing Price” n NO SURPLUS OR SHORTAGE n
Equilibrium Price P S 1 Equilibrium Price where Qd=Qs P 1 D 1 o Q 1 Quantity Q
HOW PRICES ARE DETERMINED n Surplus: When supply is greater than demand n To get rid of a surplus, stores lower prices (sales) and produce less.
Surplus: Qs > Qd P S 1 (Price Floor) P 2 Price P 1 D 1 o 15 Q 1 20 Quantity Q
HOW PRICES ARE DETERMINED n SHORTAGE: Demand is greater than supply n Stores respond by raising prices and producing more.
Shortage P S 1 Shortage: Qd > Qs (Price Ceiling) P 1 P 2 D 1 o 15 Q 1 20 Quantity Q
SURPLUS OR SHORTAGE? n A very popular singer is coming to town to perform in a concert hall that seats 10, 000 people. The ticket price for the concert is $30 person. There are 30, 000 fans in the area who are willing to pay $80 per ticket to attend the concert. What will happen?
SURPLUS OR SHORTAGE? n A very popular singer is coming to town to perform in a concert hall that seats 10, 000 people. The ticket price for the concert is $30, 000 person. There are 3, 000 fans in the area who are willing to pay $80 per ticket to attend the concert. What will happen?
SHORTAGE OR SURPLUS? n The Ford Motor Company has designed a new car that resembles a Ford model that was popular 40 years ago. Ford plans to produce 100, 000 of the new-old cars each year. Ford will price these cars at $24, 000. There are 200, 000 people per year that want to buy the car. What will happen?
SHORTAGE OR SURPLUS? n The Fish and Wildlife Department in California allows people to dig for razor clams on ocean beaches 3 days a year. There is a small charge ($10) for a license to dig these clams. Millions of people enjoy eating razor clams. During most of the year they buy razor clams in fish markets for $20 to $30 per dozen. What will happen on the days people can dig razor clams themselves?
THE PRICE SYSTEM n PRICE CEILING: highest price that can be charged for a good. n Ex: rent control apartments in NYC n Price ceilings result in SHORTAGES if set below market price. n See graph
THE PRICE SYSTEM n PRICE FLOORS: lowest price that can be paid for a good or service n EX. – Minimum Wage: lowest legal wage that can be paid to workers n Price Floors result in a SURPLUS if set above market price.
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