econ6

6.1 Introduction

• Ethanol is a bio-fuel primarily made from corn in the U.S., gaining demand as a gasoline additive.

• Corn demand increases grain prices, benefiting farmers like Brad Beckwith in Albion, Nebraska.

• Rising prices lead consumers to face higher costs for corn-derived foods.

Key Terms

Market Equilibrium

• Market equilibrium: The point where quantity demanded equals quantity supplied.

• Equilibrium price: The price at which quantity demanded equals quantity supplied.

• Equilibrium quantity: The amount of a good supplied and demanded at equilibrium pricing.

Price Controls

• Price controls: Government-imposed limits on prices.

• Price floor: Minimum price set by the government.

• Price ceiling: Maximum price set by the government.

Additional Concepts

• Rationing: Controlled distribution of limited goods.

• Black market: Illegal market trading at prices or quantities above legal limits.

6.2 What Happens When Demand Meets Supply?

• At local markets, equilibrium occurs when buying and selling matches.

• Market equilibrium achieved when supply and demand curves intersect.

• Example: Watermelon price drops from $6.50 to $5.00, reaching equilibrium with 200 melons sold.

6.3 What Happens When the Price Isn't "Right"?

Impacts of Price Discrepancies

• Shortages: Occur when prices are low, leading to excess demand.

• Surpluses: Occur when prices are high, leading to excess supply.

6.4 How Do Shifts in Demand or Supply Affect Markets?

Demand and Supply Shifters

• Demand influences change: Loss of income, population increase, new trends.

• Supply influences change: Producer numbers, production costs.

Evaluating Shifts

• Three questions determine impact of shifts:

  • Does it affect demand, supply, or both?

  • Does it shift left or right?

  • What are the new equilibrium price and quantity?

6.5 What Roles Do Prices Play in a Modern Mixed Economy?

Functions of Prices

• Convey Information: Prices signal the opportunity cost of goods and consumer demand.

• Create Incentives: Higher prices prompt producers to increase supply and attract new firms; lower prices discourage production.

• Allow Market Responds: Prices help adjust to external shocks, such as natural disasters.

• Efficient Allocation: Prices guide resources to uses consumers want.

6.6 How Does Government Intervention Affect Markets?

Price Controls and Their Effects

• Governments impose controls to stabilize prices during crises.

• Price Floors: Lead to excess supply (e.g., minimum wage).

• Price Ceilings: Result in excess demand (e.g., rent control).

Rationing and Black Markets

• Rationing distributes limited goods during shortages, while black markets arise when legal sources fail.

Summary

• Market equilibrium is achieved when supply meets demand.

• Disequilibrium occurs with price settings that create shortages or surpluses.

• Shifts in supply and demand influence the market's equilibrium state.

• Prices act as indicators to guide consumers and producers, influencing market efficiency.