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Chapter 6 notes – all sections. Price Adjustment Process. Market Equilibrium - a situation in which prices are relatively stable, and Qs = Qd (S and D cross) Surplus – Qs > Qd; price tends to go down as a result - PowerPoint PPT Presentation
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Chapter 6 notes – all sections
Price Adjustment Process
• Market Equilibrium - a situation in which prices are relatively stable, and Qs = Qd (S and D cross)
• Surplus – Qs > Qd; price tends to go down as a result
• Shortage – Qd > Qs; results in the price and quantity supplied going up usually
The Equilibrium of Supply and Demand – do not draw
Price ofIce-Cream
Cone
0 1 2 3 4 5 6 7 8 9 10 11 12Quantity of Ice-Cream Cones
13
Equilibriumquantity
Equilibrium price Equilibrium
Supply
Demand
$2.00
Markets Not in Equilibrium – do not draw
Price ofIce-Cream
Cone
0
Supply
Demand
(a) Excess Supply
Quantitydemanded
Quantitysupplied
Surplus
Quantity ofIce-Cream
Cones
4
$2.50
10
2.00
7
Markets Not in Equilibrium – do not draw
Price ofIce-Cream
Cone
0 Quantity ofIce-Cream
Cones
Supply
Demand
(b) Excess Demand
Quantitysupplied
Quantitydemanded
1.50
10
$2.00
74
Shortage
Price Ceilings
• Maximum legal price that can be charged for a product
• Example: rent control• BELOW EQUILIBRIUM• Causes a shortage
Price Ceiling – do not draw
Price Floors
• Lowest legal price that can be paid for something
• Example – minimum wage• ABOVE EQUILIBRIUM• Causes a surplus
Price Floor – do not draw
Shifting Curves with S and D
• When a S or D curve shifts it will change the Equilibrium Price and Quantity
Figure 10 How an Increase in Demand Affects the Equilibrium
Price ofIce-Cream
Cone
0 Quantity of Ice-Cream Cones
Supply
Initialequilibrium
D
D
3. . . . and a higherquantity sold.
2. . . . resultingin a higherprice . . .
1. Hot weather increasesthe demand for ice cream . . .
2.00
7
New equilibrium$2.50
10
Figure 11 How a Decrease in Supply Affects the Equilibrium
Price ofIce-Cream
Cone
0 Quantity of Ice-Cream Cones
Demand
Newequilibrium
Initial equilibrium
S1
S2
2. . . . resultingin a higherprice of icecream . . .
1. An increase in theprice of sugar reducesthe supply of ice cream. . .
3. . . . and a lowerquantity sold.
2.00
7
$2.50
4