1. Chapter 6: Prices
Economics
Mr. Robinson

2. Section 1: Combining Supply & Demand

3. The supply curve (S) is positively sloped--higher prices correspond with large quantities. This positive slope indicates the law of supply.
The demand curve (D) is negatively sloped--higher prices correspond with smaller quantities. This negative slope indicates the law of demand.

4. In a market graph, like the one displayed here, the equilibrium price is found at the intersection of the demand curve and the supply curve.

5. Price of a slice of pizza Combined Supply and Demand Schedule
Balancing the Market
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

6. 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:
Excess Demand
Excess demand occurs when quantity demanded is more than quantity supplied.
Excess Supply
Excess supply occurs when quantity supplied exceeds quantity demanded.

7. Balancing the Market
The point at which quantity demanded and quantity supplied come together is known as equilibrium.
Qs>Qd
Excess Supply
Price of market balance:
P - price
Q - quantity of good
S - supply
D - demand
P0 - price of market balance
A - surplus of demand - when P<P0
B - surplus of supply - when P>P0
Equilibrium
Qs=Qd
Excess Demand
Qs<Qd

8. Market Disequilibrium
Interactions between buyers and sellers will always push the market back towards equilibrium.
Excess supply = price cuts
Demand will…?
Excess Demand = price increases

9. Price Ceiling & Price Floor
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.
Example: rent control
A price floor is a minimum price, set by the government, that must be paid for a good or service.
Example: minimum wage

10. Section 2: Changes in Market Equilibrium

11. Two Simple Rules for Movements vs. Shifts
Rule One
When an independent variable changes and that variable does not appear on the graph, the curve on the graph will shift.
Rule Two
When an independent variable does appear on the graph, the curve on the graph will not shift, instead a movement along the existing curve will occur.

12. Change in Quantity Supplied vs. Change in Supply
Movement along the supply curve.
Caused by a change in the price of the product.
Change in Supply
A shift in the supply curve, either to the left or right.
Caused by a change in a determinant other than the price.
Input prices
Technology
Expectations

13. Change in Quantity Supplied
Price of Ice-Cream Cone S C
$3.00
A rise in the price of ice cream cones results in a movement along the supply curve. A
1.00
Quantity of Ice-Cream Cones 1 5 30

14. Change in Supply S3 S1 S2 Business that makes ice cream cones closes
Price of Ice-Cream Cone S1 S2
Decrease in Supply
Increase in Supply
Technology increases production of ice cream cones
Quantity of Ice-Cream Cones 30

15. Shifts in Supply Curve

16. Change in Quantity Demanded vs. Change in Demand
Movement along the demand curve.
Caused by a change in the price of the product.
Change in Demand
A shift in the demand curve, either to the left or right.
Caused by a change in a determinant other than the price.
Consumer income
Prices of related goods
Tastes
Expectation

17. Changes in Quantity Demanded
Price of Cigarettes per Pack
A tax that raises the price of cigarettes results in a movement along the demand curve. C
$4.00 A
2.00 D1 12 20
Number of Cigarettes Smoked per Day

18. Change in Demand D2 D1 An increase in income... $3.00 2.50 Increase
Price of Ice-Cream Cone
$3.00
An increase in income...
2.50
Increase
in demand
2.00
1.50
1.00
0.50 D2 D1
Quantity of Ice-Cream Cones 1 2 3 4 5 6 7 8 9 10 11 12

19. Shifts in Demand Curve

20. How an Increase in Demand Affects the Equilibrium
Price of
Ice-Cream
Cone
1. Hot weather increases
the demand for ice cream... D2
Supply
$2.50
New equilibrium
2. ...resulting
in a higher
price...
2.00
Initial
equilibrium D1 7 10
Quantity of
Ice-Cream Cones
3. ...and a higher
quantity sold. 46

21. How a Decrease in Supply Affects the Equilibrium
Price of
Ice-Cream
Cone
1. An earthquake reduces
the supply of ice cream... S2 S1
New
equilibrium
$2.50
2. ...resulting
in a higher
price...
2.00
Initial equilibrium
Arrange students in groups and give them hypothetical scenarios that force them to shift either supply or demand and then have them write their answers on the board. Focus on the three steps to analyze equilibrium.
Demand 1 2 3 4 7 8 9 10 11 12 13
Quantity of
Ice-Cream Cones
3. ...and a lower
quantity sold. 46

22. Section 3: The Role of Prices

23. The Role of Prices in a Free Market
Prices serve a vital role in a free market economy.
Prices help move land, labor, and capital into the hands of producers, and finished goods in to the hands of buyers.
Prices create efficient resource allocation for producers and a language that both consumers and producers can use.
Creates a standard measure of value

24. Advantages of Prices 1. Prices as an Incentive
Prices communicate to both buyers and sellers whether goods or services are scarce or easily available. Prices can encourage or discourage production.
2. Signals
Think of prices as a traffic light. A relatively high price is a green light telling producers to make more. A relatively low price is a red light telling producers to make less.
3. Flexibility
In many markets, prices are much more flexible than production levels. They can be easily increased or decreased to solve problems of excess supply or excess demand.
4. Price System is "Free"
Unlike central planning, a distribution system based on prices costs nothing to administer.

25. A Wide Choice of Goods Consumers can choose among similar products
Prices allow producers to target the audience they want

26. Efficient Resource Allocation
A market system, with its fully changing prices, ensures that resources go to the uses that consumers value most highly.
Market Problems
Imperfect competition between firms in a market can affect prices and consumer decisions.
Spillover costs, or externalities, are costs of production, such as air and water pollution, that “spill over” onto people who have no control over how much of a good is produced.
If buyers and sellers have imperfect information on a product, they may not make the best purchasing or selling decision.