1. Chapter 6: Prices Section 1

2. Objectives
Explain how supply and demand create equilibrium in the marketplace.
Describe what happens to prices when equilibrium is disturbed.
Identify two ways that the government intervenes in markets to control prices.
Analyze the impact of price ceilings and price floors on a free market.

3. Key Terms
equilibrium: the point at which the demand for a product or service is equal to the supply of that product or service
disequilibrium: any price or quantity not at equilibrium
shortage: when quantity demanded is more than quantity supplied
surplus: when quantity supplied is more than quantity demanded
price ceiling: a maximum price that can legally be charged for a good or service
rent control: a price ceiling placed on apartment rent
price floor: a minimum price for a good or service
minimum wage: a minimum price that an employer can pay a worker for one hour of labor

4. Introduction How are prices set in a market?
What factors affect price?
Prices are affected by the law of supply and law of demand.
They are also affected by actions of the government.
The government often intervenes to set a minimum or maximum price for a good or service.

5. What is Equilibrium?

6. Equilibrium
In order to find the equilibrium price and quantity, you can use supply and demand schedules.
When a market is at equilibrium, QD=QS and both buyers and sellers agree on P.
How many slices are sold at equilibrium?
Answer: 200

7. Disequilibrium
What market condition might cause a pizzeria owner to throw out many slices of pizza at the end of the day?
If the market price or quantity supplied is anywhere but at equilibrium, the market is said to be in disequilibrium.
Disequilibrium can produce two possible outcomes:
Shortage—Causes prices to rise as the demand for a good (QD) is greater than the supply of that good (QS).
QD>QS
Surplus—Causes prices to fall as the supply for a good (QS) is greater than the demand for that good (QD).
QS>QD
Checkpoint Answer: A surplus

8. Shortage and Surplus
Shortage and surplus both lead to a market with fewer sales than at equilibrium.
How much is the shortage when pizza is sold at $2.00?
How much is the surplus when pizza is sold at $4.00?
Answers: The shortage is 100 slices of pizza.

9. Price Ceiling Markets usually achieve equilibrium on their own
The government sometimes intervenes and sets market prices below equilibrium.
This results in Price ceilings (BELOW EQUILIBRIUM)
EX: Rent Control (Government subsidized housing)
Govt Sets a price ceiling on apartment rent
Ceiling price is set BELOW equilibrium
Prevents inflation (rising prices) during housing crises
Helps the poor cut their housing costs
Can lead to poorly managed buildings because landlords cannot afford the upkeep.
Put in place to protect CONSUMERS

10. The Effects of Rent Control

11. Price Floors Opposite of price ceiling is a price floor
A price floor is a minimum price set by the government.
The minimum wage is an example of a price floor.
Minimum wage affects the demand and the supply of a market, in this case, workers.
Put in place to protect PRODUCERS
What wage is the current price for labor in this market at equilibrium?
Answer: $6.60.

12. Price Supports in Agriculture
Price supports in agriculture are another example of a price floor.
They began during the Great Depression to create demand for crops.
Opponents of price supports argue that the regulations dictate to farmers what they should produce.
Supporters say that without government intervention, farmers would overproduce.