Chapter 6 Notes The Price System

Putting Supply and Demand Together!!! Copyright ACDC Leadership 2015

Market Equilibrium The price system helps producers and consumers reach market equilibrium – A situation that occurs when the quantity supplied and the quantity demanded for a product are equal at the same price.

Supply and Demand are put together to determine equilibrium price and equilibrium quantity Supply Schedule Demand Schedule S $5 4 3 2 1 P Qs $5 50 $4 40 $3 30 $2 20 $1 10 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 D 10 20 30 40 50 60 70 80 Q 4

Equilibrium Price = $3 (Qd=Qs) Equilibrium Quantity is 30 Supply and Demand are put together to determine equilibrium price and equilibrium quantity P Supply Schedule Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10 Equilibrium Price = $3 (Qd=Qs) D 10 20 30 40 50 60 70 80 Q Equilibrium Quantity is 30 5

How does the Price System steer producers and consumers toward the Equilibrium Point? As producers change prices and the quantity of goods supplied, this adjustment period works to eliminate surpluses and shortages In turn, the producers will find an equilibrium point where there are limited shortages and surpluses

What if the price increases to $4? Supply and Demand are put together to determine equilibrium price and equilibrium quantity What if the price increases to $4? P Supply Schedule Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10 D 10 20 30 40 50 60 70 80 Q 7

How much is the surplus at $4? At $4, there is disequilibrium. The quantity demanded is less than quantity supplied. P Supply Schedule Demand Schedule S $5 4 3 2 1 Surplus (Qd<Qs) P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10 How much is the surplus at $4? Answer: 20 D 10 20 30 40 50 60 70 80 Q 8

Surplus Exists when the quantity supplied exceeds the quantity demanded How do you graph it? S Surplus S>D 100>20 P D 20 Q 100

How much is the surplus if the price is $5? What if the price decreases to $2? P Supply Schedule Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10 Answer: 40 D 10 20 30 40 50 60 70 80 Q 10

How much is the shortage at $2? At $2, there is disequilibrium. The quantity demanded is greater than quantity supplied. P Supply Schedule Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10 How much is the shortage at $2? Answer: 30 Shortage (Qd>Qs) D 10 20 30 40 50 60 70 80 Q 12

Shortage Exists when the quantity demanded exceeds the quantity supplied How do you graph it? S P Shortage S<D 20<100 D Q 20 100

The FREE MARKET system automatically pushes the price toward equilibrium. Supply Schedule Demand Schedule P S When there is a surplus, producers lower prices $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10 When there is a shortage, producers raise prices D 10 20 30 40 50 60 70 80 Q 14

Price Floor Government regulation establishing a minimum price that a price can not go below! Price Floor exist when there is a surplus! Often times in the agricultural industry Graph it!

S Price Floor & surplus P D Q Prices can not go below the Price floor 5.00$ Price Floor & surplus P D Q 50 150

Price Ceiling Government regulation establishing a maximum price that a price can not go above! Price Ceilings exist when there is a Shortage! To protect consumers from price gauging. Graph it!

Price Ceiling and Shortage 3.00$ Prices can not above this point! D Q 100 250