1. Interaction of supply and
Chapter 6
Interaction of supply and
Demand
Definitions
Market Equilibrium where supply=demand
Market price The price at which supply=demand
Demand and supply schedule gives you the price and quantity supplied and quantity demanded.

2. Demand and supply schedule
price
demand
supply
$10.00
200
1000
$8.00
400
800
$6.00
600
$4.00
$2.00
Does the above demand and supply schedule follow the laws of demand and supply?
What is the equilibrium price in the above schedule?
What is the equilibrium quantity in the above schedule?

3. price
Quantity demand
Quantity supplied
$2.00
1000
200
$4.00
800
400
$6.00
600
$8.00
$10.00
Demand and supply curves are graphic representations of demand and supply schedules

4. Shortage- quantity demanded is greater than quantity supplied
Surplus quantity supplied is greater than quantity demanded
Text page 168 Holiday toys

5. Change in demand and equilibrium price
Disequilibrium –When supply and demand are not in balance
demand supply equilibrium demand supply equilibrium
price price or
then or
then

6. price
Quantity
demanded
Supplies
$10.00
200
1000
$8.00
400
800
$6.00
600
$4.00
$2.00
If demand increases by 200 units at each price level and supply remains constant what happens to equilibrium price?
Exit exercise page 172 text

7. Competition- What is your definition of competition?
Competitive pricing- goals maximizing profits and luring customers away from rival producers. Are their benefits to the consumer as well?
Characteristics of a price system
It is neutral-does not favor producer or consumer , free interaction in the market, consumers want low prices, producers want high prices.
Market driven , no central planning, price system runs itself, any exceptions?
It is flexible- when market conditions change, prices can respond quickly
It is effiicient, producers use resources to produce the goods based on profit motive.

8. Price motivates both consumers and producers
Producers- expectation of profits or possibility of losses motivates producers to enter or leave a market.
Consumers- lower prices encourage consumers to buy, Higher prices discourage consumers form buying. How do producers encourage consumers to buy? If price of a product drops there may be a surplus in the market, If prices rise there may be a shortage in the market. Can producers create shortages? Examples.

9. Price ceilings – Establish the maximum price sellers may charge for a good or service. Set below equilibrium to keep prices from rising. may result. Example rent Control, no incentive to build additional apartments or to maintain existing apartments.

10. Price floors-minimum price a consumer must pay for a goods/service Keep prices from falling. Minimum Wage is a price floor.

12. What cost $1. 00 in 1938 would cost $15. 13 in 2008
What cost $1.00 in 1938 would cost $15.13 in Also, if you were to buy exactly the same products in 2008 and 1938, they would cost you $1.00 and $0.07 respectively.

13. Rationing- is a system in which government allocates goods and services using other factors instead of price. Can result in a black market, Rationing World War II Page 183
Rationing devices
Seniority
First come first serve
Favoritism
Force
Price
The government at certain times in history rationed goods. Example-
Rationing can be unfair
Special treatment to some groups
Expensive, creates black markets

14. Alfred Marshall
Supply and demand must be studied together
First to use graphs in the study of economics
The concept of elasticity
Need to do poverty studies