1. Equilibrium
The point where quantity demanded and quantity supplied come together is known as equilibrium.
It is the point of balance between price and quantity where the market for a good is stable.
If the market price or quantity is anywhere but equilibrium, the market is in a state that economists call disequilibrium.

2. Graphical Representation of Equilibrium
Balancing the Market
Graphical Representation of Equilibrium
Price per slice
Equilibrium Point
Finding Equilibrium
Price of a slice of pizza
Quantity demanded
Quantity supplied
Result
Combined Supply and Demand Schedule
$ .50
300
100
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$.50
Slices of pizza per day 50
150
200
250
350
Supply
Demand
$2.00
$2.50
$3.00
150
100 50
250
300
350
Surplus from excess supply
$1.00
250
150
Shortage from excess demand
$1.50
200
Equilibrium
Equilibrium Price a
Equilibrium Quantity

3. Market Disequilibrium
There are two causes for disequilibrium:
Excess Demand (Shortage)
Quantity demanded > than quantity supplied.
Excess Supply (Surplus)
Quantity supplied > quantity demanded.
Buyers and sellers will always push the market back towards equilibrium.

4. Shifts in Supply
Advances in New Technology
Input Costs
Govt. Regulations/Taxes/Subsidies
Futute Expectations in Price
Global Economy
Shifts in Supply Cause the market to find a new equilibrium point

5. Shifts in Demand
Change in Income
Consumer Expectations
Change in Population
Trends/Fads
Price of Related Goods
Shifts in Demand cause the market to find a new equilibrium point.

6. Analyzing Shifts in Supply and Demand
$800
$600
$400
$200
Price
Output (in millions)
Graph A: A Change in Supply 1 2 3 4 5
Graph B: A Change in Demand
Output (in thousands)
$60
$50
$40
$30
$20
$10
900
800
700
600
500
400
300
200
100
Price
Original supply
Demand a
New demand c b
New supply b c
Supply
Original demand a
Graph A shows how the market finds a new equilibrium when there is an increase in supply. Ex. New Technology
Graph B shows how the market finds a new equilibrium when there is an increase in demand. Ex. Tastes & Preferences

7. Cell Phones
Shifts in Supply -

8. “Tickle Me Elmo”
The toy was introduced in the United States in 1996, quickly becoming a fad. Some parents literally fought other parents in stores to purchase one for Christmas. The dolls' short supply due to the unexpected demand led stores to increase their price drastically. Newspaper classifieds sold the plush toy for hundreds of dollars. People reported that the toy, originally sold for $28.99, fetched as much as $1500.

9. In some cases the government steps in to control prices.
Price Ceilings
In some cases the government steps in to control prices.
A price ceiling is a maximum price that can be legally charged for a good - results in a shortage.
When soldiers returned from World War II and started families (which increased demand for apartments), but stopped receiving military pay, many could not deal with the jumping rent. The government put in price controls, so soldiers and their families could pay the rent and keep their homes. However, this increased the quantity demanded for apartments and lowered the quantity supplied, meaning that available apartments were rapidly taken until none were left.
Ex. Rent Control

10. Price Floors
A price floor is a minimum price, set by the government, that must be paid for a good or service – results in a surplus.
Ex. Minimum Wage

11. The Role of Prices What role do prices play in a free market system?
What advantages do prices offer?
How do prices allow for efficient resource allocation?

12. The Role of Prices in a Free Market
Prices serve a vital role in a free market economy.
Prices help move land, labor, and capital into the hands of producers, and finished goods in to the hands of buyers.
Prices create efficient resource allocation for producers and a language that both consumers and producers can use.

13. Prices provide a language for buyers and sellers.
Advantages of Prices
Prices provide a language for buyers and sellers.
1. Prices as an Incentive
Communicate to both buyers and sellers whether goods or services are scarce or easily available.
2. Signals
High price - producers need to make more. Low price – producers need to make less.
3. Flexibility
4. Price System is "Free“

14. Efficient Resource Allocation
A market system, with its fully changing prices, ensures that resources go to the uses that consumers value most highly.
Market Problems
Imperfect competition
Spillover costs, or externalities, are costs of production, such as air and water pollution, that “spill over” onto people.
If buyers and sellers have imperfect information on a product, they may not make the best purchasing or selling decision.