Combining Supply & Demand Chapter 6 Section 1 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: Price Floor: 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.