1. Chapter 6.1 Combining Supply and Demand Supply + Demand and balance
Market Equilibrium
Govt control of prices
Price ceilings and Price floors

2. Balancing the Market
Combining Demand and Supply Schedules will allow a common ground to be found $
.50
1.00
1.50
2.00
2.50
3.00
Q D
Q S
300
250
200
150
100 50
350
Shortage
Equilibrium
Surplus

3. Equilibrium Point at which demand = supply
At equilibrium, market is stable
If the points are anywhere else
Market Disequilibrium
Excess Demand
Excess Supply

4. 3.50 S
Surplus
(excess supply) $
Equilibrium
Shortage
(excess demand) D
350 Q

5. Govt Intervention
Govt regulation can include price ceilings and floors
Price Ceilings - max price
Rent control
Creates greater demand

6. Govt Intervention Problems associated with Price Ceilings
Long lists/lines
Discrimination
Bribery
Abuse
Limit on profits
Cut costs/ maintenance

7. Govt Intervention Price floors - minimum price Minimum wage
Gives everyone an incentive to work
Can create a surplus of labor
Employers not willing to hire as many employees at higher wages

8. 6.2 Changes in Market Equilibrium
How do prices change in the market
New equilibrium with change in supply and demand

9. The market tends to move toward
equilibrium
More demand leads to higher prices
Prices that are too high lead to less demand
Too much surplus will cause a slash in prices
Falling prices creates higher demand

10. 3.50 S $
Surplus
Equilibrium
2.00
Shortage D Q
200
350

11. Shifts in Supply Equilibrium - where supply equals demand
A shift in the supply curve will create a new equilibrium point
New
Equilibrium
Is along the
Demand curve,
No shift in
the demand
curve S1
If the price does
not change, there
will be a surplus S2 $
To become
balanced again,
prices will drop D Q

12. Equilibrium is always changing as markets change
Technology is always improving
Rebates and sales are a method of moving goods off the shelves

13. Shift in Supply When costs of production go up, supply goes down
Curve shifts left S2 S1 $ D Q

14. Shifts in Demand If there is a sudden increase in demand
Curve shifts to the right
New demand is greater than supply
Creates a shortage
Search costs - financial and opportunity costs consumers pay in looking for a good

15. Shifts in Demand
Goods that are available get distributed to different stores
Creates long lines
limits on how many may be purchased
“first come, first serve”
Bidding wars
Price will continue to rise until Demand is met

16. Increase in Demand S $ D2 D1 Q

17. Decrease in Demand After a fad, demand can drop as fast as it went up
Now there is a surplus S $ D1 D2 Q

18. The Role of Prices Prices in the Free Market
6.3
Prices in the Free Market
Advantages to price based system
Price based system leading to more choices and more efficient use of resources

19. Prices are key to Equilibrium
Prices help move land, labor and capital to the producers and finished goods to consumers
Without prices, there would be no consistent way to measure demand

20. Advantages 1. Price as incentive 2. Price as signals
Communicate what goods are in short supply or more available
Produce more or less
2. Price as signals
If prices are high
Producers willing to make more
Consumers will buy less
Low price
Slow production
Consumers buy more

21. Advantages 3. Flexibility Increase in demand will increase price
Supply Shock - sudden shortage of a good
How does the available supply get split up
Raising price keeps only those who can afford a good in the market
Rationing - dividing up goods using methods other than price
Rationing is the basis of central planning

22. Advantages 4. Wider Variety of Goods
Prices allow consumers to pick from similar types of goods
Soviet Union vs USA
The Black Market - when people sell goods without regard for government controls on price or quantity

23. Advantages 5. Efficiency
Prices allow resources to be used where they are most valuable
Where consumers want them to go

24. Adam Smith Problems Monopolies, oligopolies Costs that fall on others
Businesses prosper by finding out what people want and making it
Problems
1. Imperfect competition
Monopolies, oligopolies
2. Spillover costs
Costs that fall on others
3. Imperfect information
May lead to a bad investment