P R I C E S

Combining Supply & Demand

Chapter 6 Section 1

P R I C E S• Objectives:

– Explain how supply and demand create balance in the marketplace.

– Compare a market in equilibrium with a market in disequilibrium.

– Identify how the government sometimes intervenes in markets to control prices.

– Analyze the effects of price ceilings and price floors.

P R I C E S• Market system makes certain that

consumers can buy the products they want, that sellers make enough profit to stay in business, and that sellers respond to changing needs and tastes of consumers.

P R I C E S• Other economic systems have been tried

– most notably, central planning/Command Economy – and have been judged by most observers to be less successful than the market system.

• The United States has a market system!

P R I C E S• Just as buyers and sellers come together

in a market, the study of demand and supply will come together in this

section.• Demand – shows how much consumers

are willing to buy at various prices.• Supply – shows how much producers are

willing to sell at various prices.

P R I C E S• The point where demand and supply come

together is called Equilibrium.

P R I C E S

P R I C E S• Equilibrium is the point of balance

between price and quantity.

• To find equilibrium price and quantity, look for the price at which quantity

supplied equals quantity demanded.

P R I C E S• In the market for most products quantities

supplied and demanded will be equal at only one price and one quantity.

• Buyers are willing to purchase as much of this product as firms are willing to

sell.

P R I C E S• Buyers will find ample supplies of this

product on the store shelves.

• Firms that are willing to sell at the equilibrium price will find enough buyers for their goods.

P R I C E S• Disequilibrium

• If the market price and quantity supplied is anywhere but at equilibrium, the

market is in a state of disequilibrium.• Disequilibrium occurs when quantity

supplied is not equal to quantity demanded in a market.

P R I C E S• Surplus

P R I C E S• Surplus:• If something shifts the demand or supply curves,

the equilibrium price and quantity will change.

• The market wants to operate at equilibrium. It’s like when atoms give up and take on

electrons to become balanced. That’s what the market does – supply and demand will change to try to get back to equilibrium.

P R I C E S• The market will always move itself to

equilibrium. • IF Price becomes $ 4.00 and QS becomes

60 – we have a surplus.• If QS > QD = we have a surplus.• A situation of excess supply in the market

P R I C E S• People (consumers) won’t buy more than

they demand.• Suppliers will start to incur losses because

they are producing more than they are selling.

P R I C E S• 1. Sellers will start to lower prices ($ 3) to

get rid of the excess supplies – the big, big sales in the stores (after X-Mas,

etc)• 2. Buyers respond to lower prices by

demanding more {increase in QD}.• 3. Producers will respond to lower prices

by supplying less product {decrease in QS}.

P R I C E S• Eventually the market gets back into

equilibrium.

P R I C E S• The opposite can occur. Shortage

P R I C E S• Shortage: a situation of too little supply in

a market. QD > QS• If Price were to drop to $ 1.00 and QD

were to increase to 55.• Consumers are demanding more than

producers are supplying.

P R I C E S• If the market were to stay here…

– Producer would respond by increasing production.– Buyers become more willing to increase price.– As producers increase production, they must increase

the selling price.– An increase in price signals consumers to buy less.

{decrease in Qd}.– An increase in price signals producers to produce

more {increase in Qs}.– Eventually equilibrium is reached.

P R I C E S• Government Intervention• Sometimes the government steps in to

control prices.• They can impose a Price Ceiling or a Price

Floor.

P R I C E S• Price Ceiling:

– a MAXIMUM price that can be legally charged for a good.

• Price Floor:– a MINIMUM price for a good or service. – i.e. Minimum Wage Laws

P R I C E S• Price Ceiling leads to a Shortage!

P R I C E S• The government places price ceilings on

some goods that are considered “essential” and might become too expensive for some consumers.

• New York City has rent control protection.• Price on open market is $900/month.• Rent Control price is $600/month.

P R I C E S• The problem with this is that landlords are

limited in how much they can earn.– Usually don’t put on a fresh coat of paint,

plant fresh flowers in the garden, etc.– They won’t get their money back through

higher rent.– Leads to apartments becoming run down,

especially if there is a waiting list to get an apartment.

P R I C E S• Was designed to help the poor get

housing in NYC.• Landlords will usually stop renting single-

bedroom apartments at $600/mo. • Instead they turn the apartments into

town-homes, condos, office space, etc

P R I C E S• Price Floors leads to a Surplus!

P R I C E S• Minimum Wage – sets a minimum price

that an employer can pay a worker for an hour of labor.

• Federal Gov’t. sets the base level• States can set their own level above the

Federal level.

P R I C E S• This is a wage that a worker will make

working full-time.• Min. Wage has caused some to lose their

job.• If min. wage is set above the equilibrium

wage, the result is a decrease in employment.

P R I C E S• Minimum Wage leads to a surplus of labor.• Business is not going to hire anymore than

they want to. Many people cannot find a job.

• Price Floors have also been used in agricultural products. Gov’t. would by the excess crops that could not be sold on the market.