Chapter 6 Prices

Video on Price, Supply, and Demand What is the effect on the market for beef if a new and cheaper feed is found for cows? How does the market deal with a shortage of people in a career? What are 3 signals that the market economy responds to?

Price of a slice of pizza Combined Supply and Demand Schedule Balancing the Market The point at which quantity demanded and quantity supplied come together is known as equilibrium. 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

Market Disequilibrium If the market price or quantity supplied is anywhere but at the equilibrium price, the market is in a state called disequilibrium. There are two causes for disequilibrium: Shortage Excess demand occurs when quantity demanded is more than quantity supplied. This is called a shortage. Surplus Excess supply occurs when quantity supplied exceeds quantity demanded. This is called a surplus. Interactions between buyers and sellers will always push the market back towards equilibrium.

Analyzing Shifts in Supply and Demand $800 $600 $400 $200 Price Output (in millions) Graph A: A Change in Supply 1 2 3 4 5 Graph B: A Change in Demand Output (in thousands) $60 $50 $40 $30 $20 $10 900 800 700 600 500 400 300 200 100 Price Original supply Demand a New demand c b New supply b c Supply Original demand a Graph A shows how the market finds a new equilibrium when there is an increase in supply. Graph B shows how the market finds a new equilibrium when there is an increase in demand.

What is rationing? Black Markets- goods are exchanged illegally at prices that are higher than officially established prices. Rationing encourages black markets. Problems- some people pay unfairly high prices and if someone cheats you, you do not have much recourse to get your money back.

Price Ceilings In some cases the government steps in to control prices. These interventions appear as price ceilings and price floors. A price ceiling is a maximum price that can be legally charged for a good. An example of a price ceiling is rent control, a situation where a government sets a maximum amount that can be charged for rent in an area.

Price Floors One well-known price floor is the minimum wage, which sets a minimum price that an employer can pay a worker for an hour of labor. A price floor is a minimum price, set by the government, that must be paid for a good or service.