1. [ 3.7 ] Equilibrium and Price Controls

2. SUPPLY AND DEMAND TOGETHER
Equilibrium Price
The price that balances quantity supplied and quantity demanded.
On a graph, it is the price at which the supply and demand curves intersect.
Equilibrium Quantity
The quantity supplied and the quantity demanded at the equilibrium price.
On a graph it is the quantity at which the supply and demand curves intersect. 36

3. SUPPLY AND DEMAND TOGETHER
Demand Schedule
Supply Schedule
At $2.00, the quantity demanded is equal to the quantity supplied! 36

4. Gasoline- Hurricane Wipes out some of the Gasoline RefineriesEp
1.00 d eq q
100

5. Achieving Equilibrium
Balancing Supply and Demand
Benefits to Buyers and Sellers

6. Achieving Equilibrium
Analyze Political Cartoons How would you describe the relationship between supply and demand shown here?

7. Achieving Equilibrium
Market equilibrium is found at the price where quantity demanded equals quantity supplied. Analyze Data How many slices are sold at equilibrium?

8. What is created if price is increased above PE?
Raising price above Pe P Q S D PE QE
What is created if price is increased above PE? P
 P → ____ QD ____ QS
QS QD ?
Creates a:
___________________
surplus QD QS
How do you eliminate a surplus? _____ P _____ QD ____ QS until _____.

9. Equilibrium
Surplus
When price > equilibrium price, then quantity supplied > quantity demanded.
There is excess supply or a surplus.
Suppliers will lower the price to increase sales, thereby moving toward equilibrium.

10. Figure 9 Markets Not in Equilibrium
(a) Excess Supply
Price of
Ice-Cream
Supply
Cone
Surplus
Demand
$2.50 10 4
2.00 7
Quantity of
Quantity
demanded
Quantity
supplied
Ice-Cream
Cones

11. Equilibrium
Shortage
When price < equilibrium price, then quantity demanded > the quantity supplied.
There is excess demand or a shortage.
Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.

12. Lowering price below Pe
What is created if price is dropped below PE? P Q S D PE QE
 P → ____ QD ____ QS
QS QD ?
Creates a:
___________________ P
shortage
This is called the “rationing function
of prices – the price allocates the good. QS QD
How do you eliminate a shortage? _____ P _____ QD ____ QS until _____.

13. Government Intervention
Price floor- price minimum that buyers are required to pay
Price ceiling- maximum price that sellers are allowed to charge for a service
Which category would a rent-controlled apartment fall into?

14. Government Intervention
Producers complain market price is too low.
_____________establishes a legal minimum price below which the price cannot fall
Creates:
_____________ P S
Price Floor PE D
Surplus QE Q
Examples: Farm price supports; minimum wage

15. Negative impacts of price floors
Reduces the quantity available
Inefficient allocation of sales among sellers- those willing to sell the good at the lowest price are not able to sell it
Inefficiently high quality- suppliers spend more on the goods to make them higher quality but consumers aren’t willing to pay for the higher quality of the good

16. Government Intervention
Consumers complain market price is too high.
______________ establishes a legal maximum price above which the price cannot rise
Creates:
______________ P S
Price Ceiling PE
Shortage D QE Q
Example: rent controls in big cities.

17. Figure 9 Markets Not in Equilibrium
(b) Excess Demand
Price of
Ice-Cream
Supply
Cone
Demand
$2.00 7
1.50 10 4
Shortage
Quantity of
Quantity
supplied
Quantity
demanded
Ice-Cream
Cones

18. Negative impacts of price ceiling
Wasted resources
Inefficient allocation to consumers- people who want the good and are willing to pay the higher price don’t get it and those willing to pay a lower price do get it
Inefficiently low quality- sellers offer lower quality goods at a low price even though buyers would prefer higher quality at a higher price

19. Effects of Disequilibrium
Shortage results when quantity demanded in a market exceeds quantity supplied. Analyze Graphs What is the shortage when pizza is sold at $2 per slice?

20. Effects of Disequilibrium
When a team keeps selling out all the seats to its games, it reflects a shortage of seats. Check Understanding What might the owner do to resolve this shortage?

21. Price Ceilings
Rent control limits price increases for rental housing. Analyze Political Cartoons What does this cartoon suggest about how some renters view rent control?

22. Price Floors
A minimum wage law can set the price of labor above the equilibrium price. Analyze Graphs In this graph, what happens to the supply of labor with a minimum wage of $7.25 per hour?

23. Price Floors
Many farmers in the United States rely on price supports or other government programs. Analyze Political Cartoons What seems to be happening to the farmer in this cartoon?

24. Price Floors
The U.S. government has supported milk prices by setting a price floor and buying the excess supply that results. Analyze Information What does the government do with the milk that it buys from farmers?

25. Quiz: Achieving Equilibrium
How many equilibrium points can exist at the same time on a combined supply and demand graph? Explain.
A. One; the supply and demand curves intersect at one point.
B. Two; each supply and demand curve contains one equilibrium point.
C. Three; the supply curve intersects the x-axis at one point, and the demand curve intersects the x-axis and the y-axis at one point each.
D. An infinite number; every point on the supply and demand curves is an equilibrium point.

26. Quiz: Effects of Disequilibrium
Under what conditions might a baker have to throw out many muffins at the end of the day?
A. a surplus, when quantity demanded is lower than quantity supplied
B. a surplus, when quantity supplied is lower than quantity demanded
C. a shortage, when quantity demanded is lower than quantity supplied
D. a shortage, when quantity supplied is lower than quantity demanded

27. Quiz: Price Ceilings
How does a price ceiling affect the quantity demanded and the quantity supplied?
A. It leads to a decrease in quantity demanded and a decrease in quantity supplied.
B. It leads to a decrease in quantity demanded and an increase in quantity supplied.
C. It leads to an increase in quantity demanded and a decrease in quantity supplied.
D. It leads to an increase in quantity demanded and an increase in quantity supplied.

28. Quiz: Price Floors
How does a minimum wage above the equilibrium rate affect the labor market?
A. It leads to a higher equilibrium wage for labor.
B. It leads to a lower equilibrium wage for labor.
C. It leads to a decreased supply of labor
D. It leads to an excess supply of labor.

29. [ 3.8 ] Changes in Market Equilibrium

30. Increasing Supply
Changing Equilibrium- a surplus leads to a decrease in supply
Simultaneous shifters of demand and supply

31. Increasing Supply
As digital cameras became cheaper and easier to produce, the supply increased. Draw Conclusions Why do you think the pace of the falling prices began to slow in 2004?

32. Decreasing Supply
This diagram gives theoretical and real-life examples of how increased input costs affect markets. Analyze Information What is the real-life consequence of this supply shift to the left?

33. Increasing Demand
Observe how a change in demand affects the original equilibrium point (a). Analyze Graphs a. What do points b and c on this graph represent? b. How has the increased demand affected price?

34. Increasing Demand
The supply of art from this painter is severely limited. Express Problems Clearly Assuming significant demand, what effect would the limited supply have on the price for this art?

35. Decreasing Demand
This is one of a shrinking number of consumers of old-fashioned photography supplies. Identify Cause and Effect What should be happening to the price of these products?

36. Quiz: Tending Toward Equilibrium
What might cause orders for microwave ovens to increase and the availability of microwave ovens to decrease?
A. falling prices
B. rising prices
C. fluctuating prices
D. stable prices

37. Quiz: Increasing Supply
What caused the supply curve for digital cameras to keep moving to the right during the early 2000s?
A. Falling transportation costs made them cheaper to supply.
B. Improved technology made them cheaper to produce.
C. Higher taxes made them more expensive for consumers.
D. Increased inventories made them more expensive for sellers.

38. Quiz: Decreasing Supply
As the supply curve shifts to the left, what happens to the equilibrium point?
A. It moves up the demand curve.
B. It moves down the demand curve.
C. It moves to the left as the demand curve shifts.
D. It moves to the right as the demand curve shifts.

39. Quiz: Increasing Demand
Which of the following explains why a firm’s decision to raise prices during a shortage helps lead to a return to equilibrium?
A. Higher prices lead to a surplus of goods.
B. Higher prices keep the shortage from ending.
C. Higher prices decrease the quantity demanded.
D. Higher prices help maintain the firm’s inventory.

40. Quiz: Decreasing Demand
Why has the demand curve for CDs shifted to the left in recent years?
A. The supply of CDs has increased.
B. New technology has caused demand to fall.
C. Higher taxes have caused supply to decrease.
D. The quality of sound produced by CDs is poor.

41. [ 3.9 ] Prices at Work

42. Prices and Consumers- price comparisons
The Price System
Prices and Consumers- price comparisons
Prices in a Free Market- allow for diversity of goods and allow the economy to return to equilibrium

43. The Price System
Price changes can move markets back to equilibrium, solving shortages and surpluses. Analyze Graphs Which problem is price solving in this graph? Explain, using the points on the graph.

44. The Benefits of the Price System
Without prices as a standard measure of value, a seller would have to barter—that is, exchange one type of good or service for another.
Under a barter system, one customer might offer two pairs of shoes in exchange for one sweater, but another customer might be willing to trade three pairs of shoes for the same sweater.
The supplier would have no consistent and accurate way to measure demand for a product. Such a system would be inconvenient, impractical, and inefficient.

45. Prices Provide Incentives- shortage or surplus
The Benefits of the Price System
Prices Provide Incentives- shortage or surplus
Prices Serve as Signals- $ drop, C buy more
Prices Are Responsive and Flexible
Supply shock- sudden shortage of resources
Rationing- allocating g/s using criteria other than price
The Price System Is “Free”- distributes g/s fairly across the economy

46. The Benefits of the Price System
Infer What message is this price tag telling shoppers?

47. The Benefits of the Price System
World War II placed many items in high demand in the United States. Analyze Charts Why might gasoline, kerosene, and other fuels be rationed during wartime?

48. The Benefits of the Price System
The price system provides consumers and producers with many benefits. Explain How can the price system do all of this and still be “free”?

49. Choice and Efficiency
In a market-based economy, consumers have a diversity of goods and services available to them. Consumers use prices to help them make choices among similar goods and services.

50. Prices and the Profit Incentive
In a free market, efficient resource allocation goes hand in hand with the profit incentive. Suppose that scientists predicted extremely hot weather for the coming summer. In most parts of the country, consumers would buy up air conditioners and fans to prepare for the heat. Power companies would buy reserves of oil and natural gas to supply these appliances with enough power.
Since demand would exceed supply, consumers would bid up the price of fans, and power plants would bid up the price of fuel.

51. The Wealth of Nations- people are motivated by profit
Prices and the Profit Incentive
The Wealth of Nations- people are motivated by profit
Market Problems- possible monopolies and negative externalities

52. Quiz: The Price System How can prices solve problems of surplus?
A. Lower prices decrease quantity demanded and decrease quantity supplied.
B. Lower prices increase quantity demanded and decrease quantity supplied.
C. Higher prices decrease quantity demanded and increase quantity supplied.
D. Higher prices increase quantity demanded and increase quantity supplied.

53. Quiz: The Benefits of the Price System
For producers and consumers all across the United States, a price of $10 has the same meaning. What advantage of prices does this represent?
A. Prices provide buyers and sellers with a common set of signals.
B. Prices serve as an incentive to action for buyers and sellers.
C. Prices are a flexible mechanism for dealing with shifts in demand.
D. Prices aid the efficient distribution of goods throughout the country.

54. Quiz: Choice and Efficiency
In a free enterprise economy, as opposed to a command economy, suppliers use prices to
A. limit their profits.
B. respond to consumer demand.
C. coordinate the bartering of goods.
D. encourage the surplus production of goods.

55. Quiz: Prices and the Profit Incentive
What, according to Adam Smith, motivated the butcher and the baker to provide people with meat and bread?
A. the gratitude they received from the community
B. the need to allocate food efficiently
C. the wish to serve the greater good
D. the opportunity for profit