Chapter 6 Prices and Decision Making.ppt

CHAPTER 6 – PRICES & DECISION MAKING

(SUPPLY AND DEMAND TOGETHER)

ADAM SMITH “THE INVISIBLE HAND”

Read and summarize what Smith is saying.

"Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it ... He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."

ADAM SMITH “THE INVISIBLE HAND”

Smith assumed that individuals try to maximize their own good (and become wealthier), and by doing so, through trade and entrepreneurship, society as a whole is better off. Furthermore, any government intervention in the economy isn't needed because the invisible hand is the best guide for the economy.

• Price is the monetary value of a product as established by supply and demand.

• Together, demand and supply make a complete picture of the market.

The Price Adjustment Process

Figure 6.1aFigure 6.1a• Price adjustments help a competitive market reach market equilibrium, with fairly equal supply and demand.

The Price Adjustment Process

Figure 6.1bFigure 6.1b

• Surpluses occur when supply exceeds demand.

The Price Adjustment Process

Figure 6.2aFigure 6.2a

The Price Adjustment Process

• Shortages occur when demand exceeds supply.

Figure 6.2bFigure 6.2b

The Price Adjustment Process

• The equilibrium price is the price at which supply meets demand.

Price Ceiling

• A maximum legal price that can be charged for a product.

• Example: Rent Control.

Price Floor

• The lowest legal price that can be paid for a good or service.

• Example: Minimum Wage.

You may want to draw everything together in one diagram.

Q

P

Eq

Shortage

Surplus

Price Ceiling

Price Floor

Price cannot go underneath this line

Price cannot go above this

line