1. Unit 2: Supply, Demand, and Consumer Choice

2. Market Equilibrium 1.What is market equilibrium? 2. What is a surplus?
3.What must producers do when they realize that they have a surplus?
4. What is a shortage?
5. How should producers change strategy to deal with a shortage?

3. Government Involvement

4. PRICE CONTROLS
Who likes the idea of having a price ceiling on gas so prices will never go over $2 per gallon?

5. To have an effect, a price ceiling must be below equilibrium
Maximum legal price a seller can charge for a product.
Goal: Make affordable by keeping price from reaching Eq.
To have an effect,
a price ceiling must be
below equilibrium P
Gasoline S $5 4 3 2 1
Does this policy help consumers?
Result: BLACK MARKETS
Price Ceiling
Shortage
(Qd>Qs) D o Q 5

6. Price Ceilings
Example:
The city of Griffin could set a limit for the price of rent on two-bedroom apartments at $350 a month. No one may charge more than this price ceiling.
What affect will this have on the apartment rentals in town?
There will be fewer apartments available to rent.
Apartment owners have no incentive to build new apartments that they cannot profit from.

7. To have an effect, a price floor must be above equilibrium
Minimum legal price a seller can sell a product.
Goal: Keep price high by keeping price from falling to Eq.
To have an effect,
a price floor must be
above equilibrium P
Corn S $ 4 3 2 1
Surplus
(Qd<Qs)
Price Floor
Does this policy help corn producers? D o Q 7

8. Price Floor
Example:
Minimum Wage-This is the lowest rate at which employers can pay their workers in most industries.
How can minimum wage laws raise unemployment?