Economics Chapter 6 Bringing Supply and Demand Together

Balancing the Market Equilibrium Price Quantity Supply Demand Equilibrium

Market Disequilibrium There are two causes for disequilibrium: Excess Demand Excess Supply

In some cases the government steps in to control prices. These interventions appear as price ceilings and price floors.

Rent Control = Price Ceiling

Minimum Wage= Price Floor

Changes in Market Equilibrium Shifts in Supply –Technology, Cost, Government, Imports, Expectations, # of suppliers Shifts in Demand –Income, Expectations, Population, Trends/Advertising, Substitutes, Complements

Shifts in Supply Understanding a Shift Old Equilibrium New Equilibrium

Excess Supply Surplus

A Fall in Supply

Shifts in Demand Excess Demand –shortage –Search Costs A Fall in Demand

Analyzing Shifts in Supply and Demand $800 $600 $400 $200 0 Price Output (in millions) Graph A: A Change in Supply Original supply Demand a New supply b c

Analyzing Shifts in Supply and Demand Graph B: A Change in Demand Output (in thousands) $60 $50 $40 $30 $20 $ Price Supply Original demand a New demand c b

The Role of Prices in a Free Market

Advantages of Prices Prices provide a language for buyers and sellers. 4 Advantages:

1.Prices as an Incentive 2.Signals 3.Flexibility 4.Price System is "Free"

Efficient Resource Allocation Resource Allocation

Market Problems –Imperfect competition –Spillover costs –Imperfect information