Chapter 6- Supply & Demand

Section 1- Equilibrium Market Equilibrium- When quantity demanded is equal to quantity supplied. Equilibrium Price- Price at which quantity demanded and quantity supplied are equal. Surplus- When quantity supplied is greater than quantity demanded. Shortage- When quantity demanded is greater than quantity supplied

Demand, Supply & Equilibrium Price If demand or supply, equilibrium price

Section 2- Prices as Signals & Incentives Competitive Pricing- Occurs when producers sell goods and services at prices that best balance btwn. Making the highest profit, and getting consumers to switch from rivals.

The Price System Four Characteristics: 1. It is Neutral – Prices don’t favor consumers or producers b/c. both makes choices that determine equllibrium price. 2. It is Market Driven - Market forces determine prices, so the system has no oversight or administrative costs.

3. It is Flexible – Prices are able to change quickly when market conditions change. – Surpluses and shortages motivate producers to change prices to reach equilibrium 4. It is Efficient - Prices adjust until the max amt. of goods and services are sold.

Prices & Motivation Incentives- Ways to encourage people to take a certain action – i.e.- sales

Section 3- Intervention in the Price System Price Ceiling- The max price sellers may charge for a good or service. Rent Control- Rent Control is used to keep housing affordable for lower-income families. It has a drawback, as it gives no reason to raise rents to match the market, so there is no incentive to increase to supply of rental housing

Price Floor An established minimum price that buyers must pay for a good or service. – i.e.- minimum wage Set up in 1938 to increase the income of workers If minimum wage is set aboe the equilibrium price, employers may decide that that higher minimum wages are not profitable, and as a result, they may choose to employ fewer workers If it is set below the equilibrium price, there is no effect

Rationing & Black Markets Rationing- A system in which the government allocates goods and services using factors other than price. – i.e.- gas rationing in the 1970s Black Market- A market in which goods or services are illegal bought and sold in violation of price controls or rationing.