SKILL-BUILDER:

When Cabbage Patch Dolls and Bey Blades started going out of

style…

Was that a change in demand or supply?

Why?

2.5a: Supply & Demand [Price Limits]

Objective: Graph price equilibriums, ceilings, and floors; analyze arguments for and against each

Guiding Question: Should there be a minimum wage?

What Does the Market “Tell Us?”

Smith’s idea of an “invisible hand” argues that the market will operate well if individuals act out of self-interest.

In terms of supply and demand, this means price will act as a signal to tell us what

buyers want and don’t want based on what they’re willing to buy.

Price Equilibrium

If we graph supply and demand together, the intersection represents the price at which we have the most possible buyers at the lowest possible price.

This point is called equilibrium.

This graph shows supply and demand, and the point where the lines meet is

the equilibrium price: $50

Equilibrium Price$50

Price Ceiling

If a maximum price is set below equilibrium, that is called a price ceiling.

Max. Price

$50

$25

Even though people would pay $50 for a month of electricity, the government could set a ceiling at

$25/month

Who benefits?

Who loses?

Price Floor

If a minimum price is set above equilibrium, that is called a price floor. Min. Price

$60

$50

On the other hand, the government could set a floor at $60/month for electricity even though more people

would buy it for $50.

Who benefits?

Who loses?

Arguments For and Against: Ceilings

Price ceilings can lead to shortages.

Ceilings make the good cheaper to buy and accessible to more people.

For example, the government caps the price of AIDs medication. Why?

Arguments For and Against: Floors

Price floors can lead to surpluses.

Intended to assist a certain group, and can help those with a lower income make more money.

In your opinion, is minimum wage a justified price floor?

Why or why not?

Price Floor or Ceiling?

The government says that landlords cannot charge more than $500 for rentCIELING

What if war Veterans cannot be paid less than $10 an hour?FLOOR

Office space cannot exceed $200 thousand dollarsCEILING

Congress is considering a law that would limit ambulance services so that they could not surpass $500 a ride

CEILING

The government declared that the price paid for a bushel of corn can’t fall below $15FLOOR

Set up a supply and demand graph of each price limit. Be sure to indicate: price, quantity, supply, demand, equilibrium, and the set-price.