Copyright © Pearson Education, Inc.Slide 1 Chapter 6, Section 1 Ch 6: What is the right price? Section 1: What factors affect price?

Copyright © Pearson Education, Inc.Slide 2 Chapter 6, Section 1 Introduction What factors affect price? –Law of demand. (households) –Law of supply (firms) –Government through price controls. We will study rent control and minimum wage

Copyright © Pearson Education, Inc.Slide 3 Chapter 6, Section 1 Equilibrium is where things are balanced: Supply = Demand at P* Market Equilibrium: Where Supply Meets Demand (p135)

Copyright © Pearson Education, Inc.Slide 4 Chapter 6, Section 1 Market Equilibrium: Where Supply Meets Demand (p135) How many slices are sold at equilibrium? What is the price?

Copyright © Pearson Education, Inc.Slide 5 Chapter 6, Section 1 If the market price or quantity is anywhere but at equilibrium, the market is said to be at disequilibrium. Disequilibrium can produce two possible outcomes: –Shortage—A shortage causes prices to rise as the demand for a good is greater than the supply of that good. –Surplus—A surplus causes a drop in prices as the supply for a good is greater than the demand for that good. Market Disequilibrium: Shortage and Surplus (p.136)

Copyright © Pearson Education, Inc.Slide 6 Chapter 6, Section 1 What does a shortage mean? What quantity is the shortage when pizza is sold at $2.00 per slice? What would a pizzeria do in response to a shortage? What is the effect on demand? Market Disequilibrium: Shortage (p.136)

Copyright © Pearson Education, Inc.Slide 7 Chapter 6, Section 1 Market Disequilibrium: Surplus (p.136) What does a surplus mean? What quantity is the surplus when pizza is sold at $4.00 per slice? What would a pizzeria do in response to a surplus? What is the effect on demand?

Copyright © Pearson Education, Inc.Slide 8 Chapter 6, Section 1 Market Disequilibrium: Government Intervention Sometimes the government intervenes and sets market prices. Two types of price controls: –Price Ceilings / Rent Control –Price Floors / Minimum Wage

Copyright © Pearson Education, Inc.Slide 9 Chapter 6, Section 1 The Effects of Rent Control (p.138) What is the equilibrium price and output of apartments? How much is rent control? Price ceiling or floor? What change from equilibrium price? Is there a surplus or shortage of apartments? What evidence?

Copyright © Pearson Education, Inc.Slide 10 Chapter 6, Section 1 The Effects of Minimum Wage (p.139) What is the equilibrium wage and output of workers? What is the minimum wage? Is it a price ceiling or floor? What is the change from equilibrium price? Is there a surplus or shortage of workers? What evidence?

Copyright © Pearson Education, Inc.Slide 11 Chapter 6, Section 1 Key Terms market: exchange between firms/sellers and households/buyers market equilibrium: the point at which the demand for a product or service is equal to the supply of that product or service disequilibrium: any price or quantity not at equilibrium shortage: when quantity demanded is more than quantity supplied surplus: when quantity supplied is more than quantity demanded

Copyright © Pearson Education, Inc.Slide 12 Chapter 6, Section 1 Key Terms, cont. price ceiling: a maximum price that can legally be charged for a good or service rent control: a price ceiling placed on apartment rent price floor: a minimum price for a good or service minimum wage: a minimum price that an employer can pay a worker for one hour of labor