Essential Question: How do Supply and Demand work together to form a picture of the economy as a whole?

Equilibrium The point where Q s = Q d

Disequilibrium Any point where Q s ≠ Q d

Individual Demand Curve The demand curve for one person; aka the quantity demanded at various prices for one person

Market Demand Curve The demand curve representing everyone in that particular market

Two different states of disequilibrium 1. Shortage:  An excess of demand  Where Q d > Q s Effects of a shortage:  Longer wait for consumers to get a good/service  Some consumers will have to go without

Two different states of disequilibrium 2. Surplus:  An excess of supply  Where Q s > Q d Effects of a surplus:  The goods/service of the producer will go to waste  Producers will want to make less or lower prices

How do we get back to equilibrium? From shortage to equilibrium:  Producers will notice the increased demand and will typically raise prices.  As prices rise, customers will buy less.  This continues over time until the market works its way back to a state of equilibrium

How do we get back to equilibrium? From surplus to equilibrium:  Producers will get tired of their good/service going to waste and will:  cut their prices and/or  produce less.  This continues over time until the market works its way back to a state of equilibrium

The point: Markets fluctuate, but tend toward a state of equilibrium. True only when prices are flexible  i.e., when they can easily change.

What happens when prices are not flexible? Price Ceiling  A maximum price that can be charged for a good/service  Ex: Rent Control Price Floor  A minimum price that can be charged for a good/service  Ex: Minimum wage & agricultural products

Check for understanding: 1. What can a price floor create in the market place? 2. What can a price ceiling create in the market place?