1. Section 1: Combining Supply & Demand
Chapter 6: Prices
Section 1: Combining Supply & Demand

2. The market system makes certain that consumers can buy products they want, that sellers make enough profit to stay in business & that sellers respond to changing needs & tastes of consumers

3. Balancing the Market
The demand schedule shows how much consumers are willing to buy at various prices
Supply schedule shows how much sellers are willing to sell at various prices

4. Comparing these schedules should allow us to find common ground for the two sides of the market

5. Defining Equilibrium
Point where demand & supply come together at the same number
Market for a good is stable
Quantities supplied & demanded will be equal at only one price & one quantity

6. 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

7. Disequilibrium
If the market price or quantity supplied is anywhere but at equilibrium
Can produce either excess demand or supply

8. Name a good or service that has experienced excess demand
Quantity demanded is more than quantity supplied
When actual price in a market is below the equilibrium price because low price encourage buyers & discouraged sellers
Name a good or service that has experienced excess demand

9. As long as there is excess demand, & quantity demanded exceeds the quantity supplied, suppliers will keep raising prices

10. When the price has risen enough to close the gap, suppliers will have found the highest price that the market will bear

11. What is another name for excess supply?
If the price is too high
After a short time, owners will cut prices
Quantity demanded will rise
What is another name for excess supply?

12. Government Intervention
Impose price ceilings
Maximum price that can be legally charged for a good
Create price floors
Minimum price for a good or service

13. Price Ceilings
Placed on some goods that are considered “essential” & might become too expensive for some consumers

14. Rent Control
Reduces the quantity & quality of housing
Landlords will have difficulty earning profits or breaking even so fewer new apartment buildings will be built & older ones might be converted into offices, stores, or condos

15. The Cost of Price Ceilings
Market must determine which 20,000 of the 40,000 households will get an apartment
Leads to long waiting lists, discrimination by landlords, & bribery
Many apartment buildings have become rundown

16. Ending Rent Control
If rents were allowed to rise, the number of apartments available would rise to 30,000
Many who could afford $900/month would find a large selection of apartments

17. Landlords would also have a great incentive to properly maintain the buildings & invest in new construction
Other hand
People would lose their homes

18. Price Floors
Imposed when government’s want sellers to receive some minimum reward for their efforts
The minimum wage
Federal government sets a base wage & states can go higher
Full time minimum wage worker will earn less than what is necessary for a couple with one child

19. If the wage is set above market equilibrium wage rate, there will be a decrease in employment
If the wage is below equilibrium, it will have no effect because employers would have to pay at least the equilibrium rate to find workers

20. Price Supports in Agriculture
Whenever the price fell below the price floor, the government created demand by buying excess crops
Congress abolished these programs in 1996 because they conflicted with free enterprise

21. Today government responded to low prices by providing emergency financial aid to farmers