1. DO NOW!! Imagine the price of gas suddenly fell to 10 cents/gal…
What would happen?
What would eventually happen the price?
2) Now imagine gas was $10/gal What would happen? How would price be effected?

2. The Economic Equilibrium
How is the market price and quantity decided?

3. Supply and Demand Separate
How much would you buy it for?
How much would you sell it for?

4. Shortage and Surplus 
At P= $2, what is Qd? Qs? Qd > Qs = Shortage (P will go up)

5. Shortage and Surplus 
At P= $9, what is Qd? Qs? Qs > Qd = Surplus (P will go down)

6. The Equilibrium 
At what Price does Qd=Qs? What is the equilibrium P and Q?

7. The Equilibrium $9 $5 $2

8. Market Efficiencies Productive Efficiency
- Produce at the lowest avg. cost
Allocative Efficiency
- Produce the set of Goods and Services most highly valued by society = Socially Optimal!
 where D = S or MB = MC

9. Moving The Equilibrium
Shift in Demand (to the right) What happened to P and Q? What might cause this?

10. Moving The Equilibrium
Shift in Supply (to the right) What happened to P and Q? What might cause this?

11. Moving The Equilibrium
Draw the graph
What happens to P and Q?
Supply Left Demand Left

12. Shifting Both Curves… 2 things happening at same time
Either P or Q will be unknown (depend on which shift is bigger)
Check each effect individually
See where they disagree…

13. Shifting Both Curves…
Ex: product is dell computers. Avg. income rises and semiconductors get more expensive…
Income up= D up = P up, Q up
Semiconductors expensive = S down = P up, Q down
P up for both = certain
Q differs = unknown!

14. Price Floors and Ceilings
Price Ceiling: legal max. price
ex: Rent control, electricity
Creates Shortage
*Must be below P* to be effective
Price Floor: legal min. price
ex: minimum wage (labor price)
Creates surplus
must be above P* to work

15. Price Floors and Ceilings
Graph like this…