Section 1: Combining Supply & Demand Chapter 6: Prices Section 1: Combining Supply & Demand

The market system makes certain that consumers can buy products they want, that sellers make enough profit to stay in business & that sellers respond to changing needs & tastes of consumers

Balancing the Market The demand schedule shows how much consumers are willing to buy at various prices Supply schedule shows how much sellers are willing to sell at various prices

Comparing these schedules should allow us to find common ground for the two sides of the market

Defining Equilibrium Point where demand & supply come together at the same number Market for a good is stable Quantities supplied & demanded will be equal at only one price & one quantity

Price of a slice of pizza Combined Supply and Demand Schedule Balancing the Market Price per slice Equilibrium Point Finding Equilibrium Price of a slice of pizza Quantity demanded Quantity supplied Result Combined Supply and Demand Schedule $ .50 300 100 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $.50 Slices of pizza per day 50 150 200 250 350 Supply Demand $2.00 $2.50 $3.00 150 100 50 250 300 350 Surplus from excess supply $1.00 250 150 Shortage from excess demand $1.50 200 Equilibrium Equilibrium Price a Equilibrium Quantity

Disequilibrium If the market price or quantity supplied is anywhere but at equilibrium Can produce either excess demand or supply

Name a good or service that has experienced excess demand Quantity demanded is more than quantity supplied When actual price in a market is below the equilibrium price because low price encourage buyers & discouraged sellers Name a good or service that has experienced excess demand

As long as there is excess demand, & quantity demanded exceeds the quantity supplied, suppliers will keep raising prices

When the price has risen enough to close the gap, suppliers will have found the highest price that the market will bear

What is another name for excess supply? If the price is too high After a short time, owners will cut prices Quantity demanded will rise What is another name for excess supply?

Government Intervention Impose price ceilings Maximum price that can be legally charged for a good Create price floors Minimum price for a good or service

Price Ceilings Placed on some goods that are considered “essential” & might become too expensive for some consumers

Rent Control Reduces the quantity & quality of housing Landlords will have difficulty earning profits or breaking even so fewer new apartment buildings will be built & older ones might be converted into offices, stores, or condos

The Cost of Price Ceilings Market must determine which 20,000 of the 40,000 households will get an apartment Leads to long waiting lists, discrimination by landlords, & bribery Many apartment buildings have become rundown

Ending Rent Control If rents were allowed to rise, the number of apartments available would rise to 30,000 Many who could afford $900/month would find a large selection of apartments

Landlords would also have a great incentive to properly maintain the buildings & invest in new construction Other hand People would lose their homes

Price Floors Imposed when government’s want sellers to receive some minimum reward for their efforts The minimum wage Federal government sets a base wage & states can go higher Full time minimum wage worker will earn less than what is necessary for a couple with one child

If the wage is set above market equilibrium wage rate, there will be a decrease in employment If the wage is below equilibrium, it will have no effect because employers would have to pay at least the equilibrium rate to find workers

Price Supports in Agriculture Whenever the price fell below the price floor, the government created demand by buying excess crops Congress abolished these programs in 1996 because they conflicted with free enterprise

Today government responded to low prices by providing emergency financial aid to farmers