[ 3.7 ] Equilibrium and Price Controls

[ 3.7 ] Equilibrium and Price Controls Learning Objectives Explain how supply and demand create equilibrium in the marketplace. Describe what happens to prices, quantities demanded, and quantities supplied when equilibrium is disturbed. Identify two ways that the government intervenes in markets to control prices and restricts the use of individual property. Analyze the impacts of price ceilings and price floors on the free market.

[ 3.7 ] Equilibrium and Price Controls Key Terms Equilibrium Disequilibrium shortage surplus price ceiling rent control price floor minimum wage

Achieving Equilibrium When you go to the store to buy something—whether it’s a cellphone, a CD, or a pair of sneakers—you can usually find it. You are benefiting from the free market system at work. Businesses are making enough profit to produce and sell the goods you want at a price you are willing to pay.

Achieving Equilibrium Prices are affected by the laws of supply and demand and by government action Balancing Supply and Demand  Equilibrium is the point of balance at which the quantity demanded equals the quantity supplied Prices are stable Benefits to Buyers and Sellers Buyers will purchase exactly as much of a good as firms are willing to sell. Perfect balance between demand and supply

Achieving Equilibrium Analyze Political Cartoons How would you describe the relationship between supply and demand shown here?

Achieving Equilibrium Market equilibrium is found at the price where quantity demanded equals quantity supplied. Analyze Data How many slices are sold at equilibrium?

Effects of Disequilibrium If the market price or quantity supplied is anywhere but at the equilibrium, the market is in a state of disequilibrium. Disequilibrium occurs when quantity supplied is not equal to quantity demanded in a market. In Figure 3.17, disequilibrium occurs at any price other than $3 per slice and at any quantity other than 200 slices. Disequilibrium can produce one of two outcomes: shortage or surplus.

Effects of Disequilibrium Shortage exists when the quantity demanded in a market is more than the quantity supplied. Moving From Shortage to Equilibrium Increase prices to drop demand Non-price determinants of demand and supply factors can also influence Surplus exists when quantity supplied exceeds quantity demanded and the actual price of a good is higher than the equilibrium price. Moving From Surplus to Equilibrium Drop prices to increase demand

Effects of Disequilibrium Shortage results when quantity demanded in a market exceeds quantity supplied. Analyze Graphs What is the shortage when pizza is sold at $2 per slice?

Effects of Disequilibrium When a team keeps selling out all the seats to its games, it reflects a shortage of seats. Check Understanding What might the owner do to resolve this shortage?

Price Ceilings Markets tend toward equilibrium, but in some cases the government intervenes to control prices. The government can impose a price ceiling, or a maximum price that can be legally charged for a good or service. The price ceiling is set below the equilibrium price.

Price Ceilings a maximum price that can be legally charged for a good or service The price ceiling is set below the equilibrium price. Government placed on goods that are considered “essential” and might become too expensive for some consumers Effects of Government Rent Control Rent Control: price ceilings placed on apartment rents, to prevent inflation during a housing crisis The price ceiling increases the quantity demanded but decreases the quantity supplied. Cost of Rent Control Shortage causes different ways to allocating homes Impacts landlord profit Consequences of Ending Rent Control Displaces those that cannot afford new price of rent

Price Ceilings Rent control limits price increases for rental housing. Analyze Political Cartoons What does this cartoon suggest about how some renters view rent control?

Price Ceilings In these graphs, a price ceiling of $600 for rent-controlled apartments is below the equilibrium price. Analyze Graphs Why does rent control lead to a shortage of desirable apartments?

Price Floors A price floor is a minimum price, set by government, that must be paid for a good or service. Governments set price floors to ensure that certain sellers receive at least a minimum reward for their efforts. Sellers can include workers, who sell their labor.

Price Floors a minimum price, set by government, that must be paid for a good or service Governments set to ensure that certain sellers receive at least a minimum reward for their efforts.  The Minimum Wage sets a minimum price employers can pay for one hour of labor.  real world is more complex Agricultural Price Supports whenever prices fell below a certain level, the government created demand by buying excess crops Supporters believed they were necessary because American farms would not easily survive in a freely competitive market Opponents argued that the regulations were a burden to farmers.  Government often responds to low prices by providing emergency financial aid to farmers.

Price Floors A minimum wage law can set the price of labor above the equilibrium price. Analyze Graphs In this graph, what happens to the supply of labor with a minimum wage of $7.25 per hour?

Price Floors Many farmers in the United States rely on price supports or other government programs. Analyze Political Cartoons What seems to be happening to the farmer in this cartoon?

Price Floors The U.S. government has supported milk prices by setting a price floor and buying the excess supply that results. Analyze Information What does the government do with the milk that it buys from farmers?

Quiz: Achieving Equilibrium How many equilibrium points can exist at the same time on a combined supply and demand graph? Explain. A. One; the supply and demand curves intersect at one point. B. Two; each supply and demand curve contains one equilibrium point. C. Three; the supply curve intersects the x-axis at one point, and the demand curve intersects the x-axis and the y-axis at one point each. D. An infinite number; every point on the supply and demand curves is an equilibrium point.

Quiz: Effects of Disequilibrium Under what conditions might a baker have to throw out many muffins at the end of the day? A. a surplus, when quantity demanded is lower than quantity supplied B. a surplus, when quantity supplied is lower than quantity demanded C. a shortage, when quantity demanded is lower than quantity supplied D. a shortage, when quantity supplied is lower than quantity demanded

Quiz: Price Ceilings How does a price ceiling affect the quantity demanded and the quantity supplied? A. It leads to a decrease in quantity demanded and a decrease in quantity supplied. B. It leads to a decrease in quantity demanded and an increase in quantity supplied. C. It leads to an increase in quantity demanded and a decrease in quantity supplied. D. It leads to an increase in quantity demanded and an increase in quantity supplied.

Quiz: Price Floors How does a minimum wage above the equilibrium rate affect the labor market? A. It leads to a higher equilibrium wage for labor. B. It leads to a lower equilibrium wage for labor. C. It leads to a decreased supply of labor D. It leads to an excess supply of labor.