Marginal Returns Increasing marginal returns occur when marginal
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Marginal Returns Increasing marginal returns occur when marginal production levels increase with new investment. Increasing, Diminishing, and Negative Marginal Returns 8 7 Negative marginal returns occur when the marginal product of labor becomes negative. Diminishing marginal returns 6 Marginal Product of labor (beanbags per hour) Diminishing marginal returns occur when marginal production levels decrease with new investment. Increasing marginal returns 5 4 3 Negative marginal returns 2 1 0 – 1 1 2 3 4 5 6 7 8 9 – 2 – 3 Labor (number of workers)
Chapter 6 Prices
Video on Price, Supply, and Demand • What is the effect on the market for beef if a new and cheaper feed is found for cows? • How does the market deal with a shortage of people in a career? • What are 3 signals that the market economy responds to?
Balancing the Market The point at which quantity demanded and quantity supplied come together is known as equilibrium. Finding Equilibrium Point Combined Supply and Demand Schedule $3. 50 $2. 00 Equilibrium Price $1. 50 $1. 00 $. 50 Supply 0 50 a Equilibrium Quantity Price per slice $3. 00 Demand 100 150 200 250 300 Slices of pizza per day 350 Price of a slice of pizza Quantity demanded Quantity supplied $. 50 300 100 $1. 00 250 150 $1. 50 200 $2. 00 150 250 $2. 50 100 300 $3. 00 50 350 Result Shortage from excess demand Equilibrium Surplus from excess supply
Market Disequilibrium If the market price or quantity supplied is anywhere but at the equilibrium price, the market is in a state called disequilibrium. There are two causes for disequilibrium: Shortage • Excess demand occurs when quantity demanded is more than quantity supplied. • This is called a shortage. Surplus • Excess supply occurs when quantity supplied exceeds quantity demanded. • This is called a surplus. Interactions between buyers and sellers will always push the market back towards equilibrium.
Analyzing Shifts in Supply and Demand Graph A: A Change in Supply Graph B: A Change in Demand $800 $60 a b $40 c Price $600 Original supply Supply $50 $400 c $30 a b $200 New supply Demand $10 0 1 2 3 Output (in millions) 4 New demand Original demand 5 0 100 200 300 400 500 600 700 800 900 Output (in thousands) • Graph A shows how the market finds a new equilibrium when there is an increase in supply. • Graph B shows how the market finds a new equilibrium when there is an increase in demand.
Price Ceilings In some cases the government steps in to control prices. These interventions appear as price ceilings and price floors. • A price ceiling is a maximum price that can be legally charged for a good. • An example of a price ceiling is rent control, a situation where a government sets a maximum amount that can be charged for rent in an area.
Price Floors • A price floor is a minimum price, set by the government, that must be paid for a good or service. • One well-known price floor is the minimum wage, which sets a minimum price that an employer can pay a worker for an hour of labor.