1. Chapter 6
Demand, Supply, & Price

2. Seeking Equilibrium: Demand and Supply
As buyers and sellers interact, the market moves towards an equilibrium.
This is called market equilibrium, a situation in which quantity demanded of a good or service at a particular price is equal to the quantity supplied at that price.

3. Market Demand and Supply Schedule
Price Per Salad ($)
Quantity Demanded
Quantity Supplied 10 40 8 15 35 6 25 4 2 A B C

4. Reaching Equilibrium Price
In order to reach equilibrium price it takes trial and error.
Sometimes the market may experience a surplus, which is the result of quantity supplied being greater than quantity demanded. This is good for the consumers because prices usually decrease.
Other times, a shortage may occur. This is when quantity supplied is less than quantity demanded. The result from this is consumers pay higher prices.

5. Change in Demand & Supply
Refer to pages and review the graphs.
Understand why the curves (demand & supply) shift either right or left.
What is happening to the equilibrium price?

6. Equilibrium Price and Changes in Demand and Supply
Increases
Equilibrium
Price
Falls
If demand
decreases
THEN OR

7. Equilibrium Price and Changes in Demand and Supply
rises
If Demand
increases
Supply
decreases
THEN OR

8. Price as Signals & Incentives
Pricing doesn’t just happen, there are factors that lead to it rising, falling, and meeting equilibrium.
An example is competitive pricing, which is when producers sell products at lower prices to lure customers away from rivals, while still making a profit.

9. Characteristics of Price System
In a market economy, price system has four characteristics.
It is neutral – prices don’t favor producer or consumer, both make choices to determine equilibrium
It is market driven – market forces, not government, determine prices. It essentially runs itself

10. Characteristics of Price System
It is flexible – When market conditions change, prices are able to change quickly.
It is efficient – Prices will adjust until the maximum number of goods and services are sold.

11. Intervention in the Price System Imposing Price Ceilings
Sometimes people or the government interferes with the free market to set prices. They do this to keep the prices from going too high. This is called a price ceiling. The price ceiling is set below the equilibrium price so a shortage will result.
Look at the two examples on pg of price ceilings

12. Setting Price Floors
On other occasions, the government may intervene and may institute a price floor. This is done to create a surplus of goods and services.
The government has set price floors on agricultural products such as corn, milk, peanuts, and other agricultural crops.
The government also created minimum wage which is the minimum amount an employer must pay for one hour of work.

13. Rationing Resources and Products
In periods of national emergency, like a war, the government has used a system of rationing to distribute scarce products or resources.
The government does not use price as a means of allocation. Instead it utilizes the lottery method, or the first-come, first-served basis.
The downfall to rationing is that it creates a perfect environment for a black market. This means goods & services are illegally bought and sold in violation of price controls or rationing.

14. Rationing