Unit 2: Supply, Demand, and Consumer Choice

Market Equilibrium 1.What is market equilibrium? 2. What is a surplus? 3.What must producers do when they realize that they have a surplus? 4. What is a shortage? 5. How should producers change strategy to deal with a shortage?

Government Involvement

PRICE CONTROLS Who likes the idea of having a price ceiling on gas so prices will never go over $2 per gallon?

To have an effect, a price ceiling must be below equilibrium Maximum legal price a seller can charge for a product. Goal: Make affordable by keeping price from reaching Eq. To have an effect, a price ceiling must be below equilibrium P Gasoline S $5 4 3 2 1 Does this policy help consumers? Result: BLACK MARKETS Price Ceiling Shortage (Qd>Qs) D o 10 20 30 40 50 60 70 80 Q 5

Price Ceilings Example: The city of Griffin could set a limit for the price of rent on two-bedroom apartments at $350 a month. No one may charge more than this price ceiling. What affect will this have on the apartment rentals in town? There will be fewer apartments available to rent. Apartment owners have no incentive to build new apartments that they cannot profit from.

To have an effect, a price floor must be above equilibrium Minimum legal price a seller can sell a product. Goal: Keep price high by keeping price from falling to Eq. To have an effect, a price floor must be above equilibrium P Corn S $ 4 3 2 1 Surplus (Qd<Qs) Price Floor Does this policy help corn producers? D o 10 20 30 40 50 60 70 80 Q 7

Price Floor Example: Minimum Wage-This is the lowest rate at which employers can pay their workers in most industries. How can minimum wage laws raise unemployment?