Markets, Equilibrium, and Prices Chapter 6

What Happens When Demand Meets Supply? In a perfectly competitive market, demand and supply work together to determine prices Direct and indirect communication between consumers and producers drives prices to a market equilibrium point At market equilibrium, quantity demanded and quantity supplied are equal.

What Happens When Demand Meets Supply? At market equilibrium, quantity demanded and quantity supplied are equal. On a graph, the equilibrium point is the point of intersection of the demand and supply curves.

What Happens When Demand Meets Supply? Equilibrium price can also be described as the market-clearing price, or the “right” price. At this price, both consumers and producers are satisfied.

What Happens When Demand Meets Supply? REMEMBER: The “right price” doesn’t mean a low price or a price you would necessarily like. It just means the point that both supply and demand intersect.

What Happens When the Price Isn’t Right? When prices are set above or below equilibrium price, disequilibrium occurs: This means that quantity demanded does not equal quantity supplied. Equilibrium quantity, as determined by the market equilibrium point, is disrupted.

What Happens When the Price Isn’t Right? When prices are too low, excess demand leads to shortages. When prices are too high, excess supply leads to surpluses. Adjusting prices can restore equilibrium.

What Happens When the Price Isn’t Right? REMEMBER: Adjusting prices is NOT easy. Prices can be “sticky” for many reasons. But, given time, they will move to equilibrium.

How Do Shifts in Demand or Supply Affect Markets? To analyze how an event will affect market equilibrium, ask yourself these three questions: Does the event affect market supply, demand, or both? (ch. 5) Does the event shift the demand or supply curve to the right (increase) or to the left (decrease)? What are the new equilibrium price and quantity? How have they changed as a result of the event?

How Do Shifts in Demand or Supply Affect Markets? REMEMBER: Don’t confuse movement along the curve with a SHIFT in the curve. When ONLY price changes, there is movement ALONG the curve to meet the new quantity demanded or supplied. The curve itself DOES NOT shift!

What Roles Do Price Play in a Modern Mixed Economy? Prices convey information by signaling opportunity cost to consumers and helping producers make production decisions. Prices provide an incentive for firms and workers to produce Prices give markets flexibility to respond to changing conditions Prices guide scarce resources to their most efficient uses.

What Roles Do Price Play in a Modern Mixed Economy? REMEMBER: In a free market economy, we are not victims of prices. A seemingly high price is still the “right” price if consumer demand is high or producer supply is low.

How Does Government Intervention Affect Markets? Because of political pressure, governments sometimes implement price controls when prices are considered unfairly high for consumers or unfairly low for producers.

How Does Government Intervention Affect Markets? A price floor, such as a minimum wage, prevents prices from going too low. The result is excess supply, which causes a surplus. A price ceiling, such as rent control, prevents prices from going too high. The result is excess demand, which causes a shortage.

How Does Government Intervention Affect Markets? Shortages may result in government imposed rationing, the controlled distribution of a limited supply of a good or service. Or they may create black markets, in which goods are traded at prices or in quantities higher than allowed by the law.