Putting Supply and Demand Together Eco 7/4 Putting Supply and Demand Together

Equilibrium Price As price of a good goes down, quantity demanded rises and quantity supplied falls. As price goes up, quantity demanded falls and quantity supplied rises.

Equilibrium Price The price at which quantity demanded and quantity supplied meet. At this price, quantity supplied by sellers is the same as quantity demanded by buyers.

Equilibrium Price

Shifts in Equilibrium Price Ex: A discovery that listening to CDs will prolong life increases demand, shifting the demand to the right. The change in demand increases the equilibrium price. See figure 7.12, p. 196

Prices Serve as Signals In free market economies, prices serve as signals. Rising prices signal producers to produce more and consumers to buy less. Falling prices signal producers to produce less and consumers to buy more.

Shortages Shortage- when at the current price, the quantity demanded is more than quantity supplied. If the market is left alone- without gov’t regulations- shortages put pressure on prices to rise. Quantity demanded would fall and quantity supplied would rise.

Surpluses At prices above the equilibrium price, suppliers produce more than consumers want to buy, creating a surplus.

Market Forces A market economy eliminates shortages and surpluses. When shortages occur, the market takes care of itself. Supply goes up to eliminate the shortage. When surpluses occur, price falls to eliminate the surplus.

Price Controls Why would gov’t set prices??? Sometimes it thinks the market forces of supply and demand are unfair. It protects consumers and suppliers. Special interest groups pressure elected officials to protect certain industries.

Price Ceilings Price ceiling is a government-set maximum price that can be charged for goods and services. Ex: city officials may set a maximum price a landlord can charge for rent.

Price Ceilings Lead to non-market methods of distribution. Shortages lead to: rationing- limiting items that are in short supply. It’s expensive! Black market- illegally high prices are charged for items in short supply.

Rationing Black Market

Surpluses Surplus- large inventories of goods- put pressure on the price to drop to the equilibrium price. When price fall, suppliers supply less and consumers buy more, eliminating the surplus.