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Combining Supply & Demand Prices are affected by the laws of supply and demand and by government action.

Supply and Demand Meet The point where demand and supply come together is called the equilibrium. Equilibrium is the point of balance at which quantity demanded equals the quantity supplied. At this point the market is stable.

Disequilibrium Disequilibrium occurs when quantity supplied is not equal to quantity demanded in a market. The problem of shortage- also known as excess demand-exists when the quantity demanded in a market is more than the quantity supplied.

Surplus If the price is to high, the market will face the problem of surplus, also known as excess supply. A surplus exists when quantity supplied exceeds quantity demanded and the actual price of a good is higher than the equilibrium price.

Price Controls... u Are usually enacted when policymakers believe the market price is unfair to buyers or sellers. u Result in government-created price ceilings and floors.

Price Ceilings & Price Floors Price Ceiling uA legally established maximum price at which a good can be sold. A binding price ceiling will be set below the equilibrium price. Price Floor uA legally established minimum price at which a good can be sold. A binding price floor will be set above the equilibrium price.

The Role of Prices Prices act as incentives for buyers and sellers. Prices are signals that tell buyers and sellers what to do or not to do. Prices provide a common language and standard measure of value. Prices allow producers to allocate their resources efficiently.