Combining Supply and Demand

Equilibrium

• Equilibrium is the point where supply and demand come together– Balance between price

and quantity– The market is good

and stable

Market Disequilibrium

• 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:– Excess of Supply– Excess of Demand

Excess of Supply

• Excess supply occurs when quantity supplied exceeds quantity demanded.

Excess of Demand

• Excess demand occurs when quantity demanded is more than quantity supplied.

Price Floor

• A price floor is a minimum price, set by the government, that must be paid for a good or service.

• Can be setup above or below equilibrium• Putting the floor above equilibrium is the

preferred method.

Price Floor

• Above equilibrium– Consumers don’t

want to buy goods– Suppliers will then

supply more– LAW OF SUPPLY

Price Ceiling

• A price ceiling is a maximum price that can be legally charged for a good.

• Can be setup above or below equilibrium• Putting the ceiling below equilibrium is the

preferred method

Price Ceiling

• Below equilibrium• Creates more

demand than at equilibrium.

• Supply will go down• LAW OF DEMAND

Pric

e pe

r slic

e

Equilibrium Point

Finding Equilibrium

Price of a slice of

pizza

Quantity demanded

Quantity supplied Result

Combined Supply and Demand Schedule

$ .50 300 100

$3.50

$3.00

$2.50

$2.00

$1.50

$1.00

$.50

Slices of pizza per day

050 100 150 200 250 300 350

Supply Demand

Balancing the MarketInteractions between buyers and sellers will

always push the market back towards equilibrium.

$2.00

$2.50

$3.00

150

100

50

250

300

350

Surplus from excess supply

$1.50 200 200 Equilibrium

Equilibrium Price

a

Equi

libriu

m

Qua

ntity

$1.00 250 150

Shortage from excess demand