Chapter 6 Sections 1 & 2

 Market Equilibrium ◦ At a certain price, quantity demanded and quantity supplied are equal  Equilibrium Price ◦ Price at which quantity demanded and quantity supplied are equal

 Law of Demand and Supply interact  Vertical axis shows various prices  Horizontal axis shows quantity of product  Intersect at Equilibrium  Surplus-more quantity supplied than demanded ◦ Shown above or below equilibrium point ◦ Measured by horizontal difference between 2 curves ◦ Prices tend to fall, producers cut back production  Shortage-more quantity demanded than supplied ◦ Prices rise, producers increase quantity supplied

 Disequilibrium ◦ Imbalance between quantity demanded and quantity supplied  Decrease in demand shifts move to the left ◦ Demand curve intersects supply curve at lower price ◦ Equilibrium price falls, fewer units sold even if price is lower  Increase in demand shifts move to the right ◦ Equilibrium prices rise, more units sold even if price is higher

 Competitive Pricing- Selling products at lower prices than others ◦ Lures customer away from rival competitors ◦ Maintains overall profits by selling more units

 Neutral ◦ Interaction of consumers, producers set equilibrium prices  Market Drive ◦ Market forces, not central planners determines prices  Flexible ◦ Surpluses, shortages lead producers to change prices  Efficient ◦ Prices adjust until maximum number of products sold

 Prices motivate consumers and producers to act in different ways  Incentive: Encourages people to act in a certain way  In price system, incentives move producers and consumers ◦ Both act in own best interest

Vocabulary Market EquilibriumAt a certain price, quantity demanded and quantity supplied are equal Equilibrium PricePrice at which quantity demanded and quantity supplied are equal Surplusmore quantity supplied than demanded Shortagemore quantity demanded than supplied DisequilibriumImbalance between quantity demanded and quantity supplied Competitive PricingSelling products at lower prices than others NeutralInteraction of consumers, producers set equilibrium prices Market DriveMarket forces, not central planners determines prices FlexibleSurpluses, shortages lead producers to change prices EfficientPrices adjust until maximum number of products sold IncentiveEncourages people to act in a certain way