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.

Market Equilibrium or Market Clearing Price

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.

Price Floors and Ceilings To control prices, governments sometimes set PRICE CEILINGS and PRICE FLOORS. Price ceilings— government regulations that establish a maximum price for a particular good. Price floor— government regulation that establishes a minimum price.

The Unintended Consequences of Price Ceilings Sometimes the government decides that “prices are too high”… And that it should do something to “help” consumers… So it sets a price ceiling. The best example of a price ceiling is RENT CONTROL— A MAXIMUM PRICE for housing. However, rent control keeps prices TOO LOW… When prices are too low, Quantity Demanded… SKYROCKETS… But at low prices, there is little incentive for SUPPLIERS… And this ALWAYS leads to… SHORTAGES. The Unintended Consequences of Price Ceilings

Price Ceiling The government sets the price at $2.00. It cannot go any higher. This will cause a shortage of 20. QS = 20 QD = 40

The Unintended Consequences of Price Floors Sometimes the government decides that “prices are too low”… And that it should do something to “help” suppliers… So it sets a price floor. The best example is MINIMUM WAGE—the MINIMUM PRICE that workers can accept for their labor. However, this keeps LABOR PRICES too high… When the price of labor is HIGH… QUANTITY DEMANDED is… LOW… Causing a SURPLUS of workers. PRICE FLOORS cause SURPLUSES. The Unintended Consequences of Price Floors

Price Floor The government sets the price at $4.00. This creates a surplus of 20. QD=20 QS=40 Surplus of 20

The implementation of a government-mandated minumum price is known as a... iRespond Question Multiple Choice F E8BCF549-F983-0A45-A961-17FEA2385B8F A.) price floor. B.) price ceiling C.) surplus D.) shortage E.)

A common unintended consequence of price ceilings is... iRespond Question Multiple Choice F 2EE34C8F-C2C1-8446-B313-4CB5E50268C5 A.) surpluses B.) shortages C.) scarcity D.) E.)

The best example of price floor is... iRespond Question Multiple Choice F D466A658-1139-FA43-A53B-0D625003AE1A A.) rent control B.) minimum wage C.) sales tax D.) social security E.)