Supply …Meets Demand

Essential Standards The student will explain how prices and profits work to determine production and distribution in a market economy. The student will describe the role of buyers and sellers in determining equilibrium price. The student will illustrate on a graph how supply and demand determine equilibrium price. The student will explain and illustrate on a graph how price floors create surpluses and price ceilings create shortages.

Market Equilibrium A situation where the quantity supplied and the quantity demanded are EQUAL… And the needs of both producers and consumers are satisfied.

Demand and Supply Schedule for Shoes Price Q.D. Q.S. $15 180 $30 150 30 $45 120 60 $60 90 $75 $90 $105

Supply & Demand Schedule for Shoes Quantity Demanded and Supplied $105- $90- $75- $60- $45- $30- $15- $0,0 30 60 90 120 150 180 P R I C E Quantity Demanded and Supplied

A Delicate Balance The market is rarely in equilibrium. Usually the market is in disequilibrium—when quantity supplied is not equal to quantity demanded. Disequilibrium results in surpluses and shortages. Surplus—quantity supplied exceeds quantity demanded. Shortage—quantity demanded exceeds quantity supplied.

Consequences of Price Floors and Ceilings To control supply, governments sometimes set PRICE CEILINGS and PRICE FLOORS. Price ceilings—government regulations that establish a maximum price for a particular good. Example—rent controls, gas prices (in some areas). Price floor—government regulation that establishes a minimum price. Example—minimum wage.

The Unintended Consequences of Price Ceilings Remember the gas shortage that hit Atlanta during September of 2008? At its peak, it was ILLEGAL for gas stations to charge more than $4.39 a gallon. Stations that did were fined (if they were caught). Question: during the shortage, what did you do nearly EVERY TIME you were driving and happened to see a station that actually had gas? Did you really need gas? What would have happened if gas stations would have been allowed to charge whatever they wanted--$10, $12, $15 a gallon? Price ceilings cause SHORTAGES!

The Unintended Consequences of Price Floors Say a company has ten employees… And the minimum wage is increased from $5.25, to $6.55, to $7.25 over two years. That company might have to ELIMINATE two or three of their employees… Because they are now too expensive to employ. If something like that happens at thousands of companies around the country… Hundreds of thousands of people will be out of work. This is a labor SURPLUS… More WORKERS than JOBS… Price floors cause SURPLUSSES!

Price Floors and Agriculture Let’s say it costs an American farmer $1 to grow a bushel of corn… And the market price for a bushel is only 80 cents. The US government will routinely set a “price floor” of $1.20… And pay the farmer the difference, PLUS a little more… So the farmer recoups his costs, AND earns a small profit. So what happens? Farmers routinely grow TOO MUCH corn… Resulting in…? Corn surpluses. And what are we gonna do with all this extra corn? Turn it into high-fructose corn syrup and use it for sweetener… It’s CHEAPER, LESS TASTY and LESS HEALTHY than sugar cane syrup. But what about the poor sugar farmer who has now lost business to the corn syrup guys? Give him a subsidy—pay him NOT to grow sugar cane.

Graphing Changes in Supply and Demand