07/09/15
Lesson 1-Equilibrium and Market Efficiency
Learning Objective: I can explain the effect changes in demand and supply upon the equilibrium.
DA:
DA:
Hand back corrected exams and answer any questions.
What if producers try to raise and lower the price:
- Figure (a) producers raised the price from Pe-P1 which creates an excess of supply, Q1-Q2. Demand has decreased to Q1 and supply increased to Q2.
- What needs to happen in order to eliminate the surplus?
- Equilibrium=self righting
- Figure (b) producers lowered the price to P2.
- Quantity demanded will rise to Q4 and supply falls to Q3, excess of demand of Q3-Q4.
- What needs to happen in order to eliminate the shortage?
The role of the price mechanism
- Resources are allocated, and re-allocated, in response to changes in price.
- If there is an increase in the price of a good, due an increase in demand for the good, then this gives a "signal" to producers that consumers wish to buy this good.
- Producers look to maximize their profit. Therefore, producers will allocate more resources towards those demanded goods.
- Remember Adam Smith's quote? How does the price mechanism relate to the quote?
HW if not completed