1. Equilibrium Price  A. In the real world, demand and supply work together.  B. The price at which the supply meets the demand—where the two curves intersect—is the equilibrium price.  What is the equilibrium price and why is it important?  The price at which supply and demand meet; because it shows how the market works to establish prices.

2. Shifts in Equilibrium Price  A. If the demand curve shifts due to something other than price, the equilibrium price will change.  B. If the supply curve shifts due to something other than price, the equilibrium price will change.  Suppose that your jeans are at the equilibrium price. There is suddenly a shortage of cotton in the world market. What will happen to the demand curve, the supply curve, and the equilibrium price?  The supply curve will shift to the left, meaning that less pairs of jeans will be produced. The demand curve will remain the same. The price will go up. Then the demand will decrease because the price will have increased. Finally the equilibrium price will be higher than before.

3. Prices Serve as Signals  A. Rising prices signal producers to make more and consumers to purchase less.  B. Falling prices signal producers to make less and consumers to purchase more.  C. Shortages occur when the quantity demanded (at equilibrium price) is greater than quantity supplied.  D. Surpluses occur when the quantity supplied (at equilibrium price) is greater than quantity demanded.  E. Market forces can cause the prices to rise or fall to correct shortages and surpluses.

4. Think of a situation in which it is important that the government prevent market forces from dealing with shortages and surpluses.  Ex. Katrina - In a natural disaster, such as a flood, many people need water and food. At such a time there is a shortage of clean water for drinking. If government did not intervene, market forces would cause the prices of water (needed for basic human survival) to increase to a point that many people could not afford it, and they would be ill or die.

5. Price Controls  A. Price ceilings are a maximum price set by the government to prevent prices from going above a certain level.  B. Items in short supply might be rationed.  C. Shortages can lead to a black market, or illegal places to purchase such products at exorbitant prices.  D. Price floors are minimum prices also set by the government to prevent prices from going below a certain level.  E. Price floors set minimum wage levels and support agricultural prices.