1. [ 3.7 ] Equilibrium and Price Controls

2. [ 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. [ 3.7 ] Equilibrium and Price Controls
Key Terms
Equilibrium
Disequilibrium
shortage
surplus
price ceiling
rent control
price floor
minimum wage

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

5. 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.

6. 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. Disequilibrium can produce one of two outcomes: shortage or surplus.

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

8. 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

9. 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.

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

11. 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.

12. 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.

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

14. 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?

15. 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.