1. Background
Anyone who has haggled over price of a used car, an antique, or anything at a garage sale knows the opposing interests of buyers and sellers.
Buyers always want to pay lowest possible price, while sellers hope to sell at highest possible price.
With buyers & sellers at odds, how can a market system satisfy both groups?
In a free market system, supply & demand work together.
Result is a price that both sides can live with.

2. Supply and Demand
Both supply & demand influence price of a good and quantity produced
We’ll generally be looking for the equilibrium (market clearing price) = quantity demanded equals quantity supplied

3. Supply and Demand Review
What were factors that shifted demand?
Consumer Expectations
Population
Tastes and Preferences
Income
Fads
What were factors that shifted supply?
Government
Number of suppliers
Cost of inputs
Natural disasters
Technology
Outsourcing
Producer Expectations
How can we use supply and demand curves to analyze changes in market equilibrium?

4. Excess Supply= surplus
Understanding a Shift
Markets tend toward equilibrium, change in supply will lead market to new equilibrium price & quantity sold.
Excess Supply= surplus
If surplus occurs, producers reduce prices to sell products.
Creates new market equilibrium AND eliminates surplus.
Fall in Supply =shortage
As supply decreases, producers will raise prices and demand will decrease.
SURPLUS= PRODUCERS REDUCE PRICES & SUPPLY LESS=ENCOURAGES MORE DEMAND&THEREFORE SURPLUS WILL BE ELIMINATED

5. Disequilibrium
Excess Supply
Quantity supplied is more than quantity demanded
Suppliers would lower prices until could sell their inventory
Excess Demand
Quantity demanded is more than quantity supplied
Suppliers would raise prices until fewer people demanded the good
Interactions between buyers & sellers pushes the market back towards equilibrium.

6. Government Intervention
Markets usually naturally move towards equilibrium point
In some cases government steps in to control prices.
This appears as :
Price ceilings
price ceilings
Price floors

7. Price Ceilings: maximum legal price
Occurs when price is artificially held below the equilibrium price & is not allowed to rise (can’t charge more)
Why? Some G&S are deemed essential & could become too expensive
Rent control is most common example

8. Rent Control: situation where government sets a maximum amount that can be charged for rent in an area.

12. John Stossel—Rent Control

13. The Cost of Price Ceilings=
When price cannot rise to equilibrium level, creates a SHORTAGE
How to allocate resources
Luck?
Bribery?
Black Market?
Creates rationing problem – who gets good/service, who doesn’t???
Cost-cutting (slumlords)
$1 Pizza too cheap for all that work
Cheap rent not enough to make landlords keep up their property

14. How to resolve shortage (excess demand) problem?
First come- first served
Sellers choice
Lottery
Government Choice

15. Examples
Gasoline in California –

16. Negatives
Benefits the buyer, a loss for the seller
Black Market

17. Price Floors: minimum legal price
Exists when the price is artificially held above the equilibrium price and is not allowed to fall (can’t charge less)
Govt. trying to guarantee a price to protect producers/suppliers

18. Price floors create surpluses!
Happens when govt. wants sellers to get a mimimum reward
One well-known price floor is the minimum wage, which sets a minimum price that an employer can pay a worker for an hour of labor.
Did this b/c producers use more resources to make goods than consumers are willing to pay $ for. SO GOVT. PAYS AND STORES THE AGRICULTURAL PRODUCTS. Found that it was conflicting with free enterprise & stopped, now gives emergency aid to farmers.

19. Examples President Obama Minimum Wage Minimum Wage
Does Minimum Wage Hurt the Worker?
Businessman on Minimum Wage
Creates a surplus of …

21. MARY POPPINS QUITS

22. Solutions to a surplus:
Absorb the surplus
Change the name of the product
Incentives

23. JOHN OLIVER