Predict how prices change when there is either a shortage or surplus. 7.5B – Supply and Demand Predict how prices change when there is either a shortage or surplus.

Introduction Questions What are the advantages and disadvantages of wage and price controls and what affect do they have on the economy? How do consumers and markets react to both shortages and surpluses? What role does the government play when either a shortage or surplus of goods and services exists?

Price Change Price will change with Supply and Demand. If there is a Shortage, price will go up. If there is a Surplus, price will go down.

Supply & Demand Curve

Surplus If there is a surplus, producers produced too much of a product. Sometimes producers overestimate the demand and produce too much of a product and cannot sell the product. This is when items will go on sale. Price will go down when there is a surplus.

Surplus

Shortage If there is a shortage, producers did not produce enough of an item. Sometimes producers underestimate the market and do not produce enough of an item and the price will go up. Price will then tend to go up and an item may be hard to find. What are some products intentionally kept in a shortage by the producers?

Shortage

The Nintendo Wii was intentionally produced to have a shortage to keep demand for it high.

Consumer Tastes Sometimes consumer tastes change. Some items go out of style (like bell-bottom jeans from the 1970s) and some items fall behind technologically (like the TV screen you are looking at). As consumer tastes change, so will demand. Therefore changing the price of an item.

Who can forget the leisure suit?

Wage and price control Sometimes the government will regulate price: Price Floor Price Ceiling Minimum Wage Interest Rates Taxes

Price Floor & Price Ceiling The government will sometimes put a minimum and maximum price possible for an item. Price floor is the lowest possible price the government will allow someone to charge you. Price ceiling is the highest possible price. For example, the government may say that gas prices must fall between $2.50 and $3.50.

Minimum wage The government will not allow a business to pay an employee wages less than a certain amount. The current minimum wage is $7.25/Hour.

Interest Rates Sometimes the government will raise or lower interest rates. Interest rates are added to any loan or mortgage. It is added to the principle borrowed. The higher the interest rate, the more you will end up paying. The lower the interest rate, the less you will pay.

Interest rates have been lowered because of the slumping housing market.

Inflation Deflation Inflation – the raising of prices over time. The dollar is worth less today than it was 30 years ago. Deflation – the lowering of prices over time.