1. Chapter 6
Prices

2. Video on Price, Supply, and Demand
What is the effect on the market for beef if a new and cheaper feed is found for cows?
How does the market deal with a shortage of people in a career?
What are 3 signals that the market economy responds to?

3. Price of a slice of pizza Combined Supply and Demand Schedule
Balancing the Market
The point at which quantity demanded and quantity supplied come together is known as equilibrium.
Price per slice
Equilibrium Point
Finding Equilibrium
Price of a slice of pizza
Quantity demanded
Quantity supplied
Result
Combined Supply and Demand Schedule
$ .50
300
100
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$.50
Slices of pizza per day 50
150
200
250
350
Supply
Demand
$2.00
$2.50
$3.00
150
100 50
250
300
350
Surplus from excess supply
$1.00
250
150
Shortage from excess demand
$1.50
200
Equilibrium
Equilibrium Price a
Equilibrium Quantity

4. Market Disequilibrium
If the market price or quantity supplied is anywhere but at the equilibrium price, the market is in a state called disequilibrium. There are two causes for disequilibrium:
Shortage
Excess demand occurs when quantity demanded is more than quantity supplied.
This is called a shortage.
Surplus
Excess supply occurs when quantity supplied exceeds quantity demanded.
This is called a surplus.
Interactions between buyers and sellers will always push the market back towards equilibrium.

5. Analyzing Shifts in Supply and Demand
$800
$600
$400
$200
Price
Output (in millions)
Graph A: A Change in Supply 1 2 3 4 5
Graph B: A Change in Demand
Output (in thousands)
$60
$50
$40
$30
$20
$10
900
800
700
600
500
400
300
200
100
Price
Original supply
Demand a
New demand c b
New supply b c
Supply
Original demand a
Graph A shows how the market finds a new equilibrium when there is an increase in supply.
Graph B shows how the market finds a new equilibrium when there is an increase in demand.

6. What is rationing?
Black Markets- goods are exchanged illegally at prices that are higher than officially established prices.
Rationing encourages black markets.
Problems- some people pay unfairly high prices and if someone cheats you, you do not have much recourse to get your money back.

7. Price Ceilings
In some cases the government steps in to control prices. These interventions appear as price ceilings and price floors.
A price ceiling is a maximum price that can be legally charged for a good.
An example of a price ceiling is rent control, a situation where a government sets a maximum amount that can be charged for rent in an area.

8. Price Floors
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.
A price floor is a minimum price, set by the government, that must be paid for a good or service.