1. Chapter 6SectionMain Menu Combining Supply and Demand How do supply and demand create balance in the marketplace? What are differences between a market in equilibrium and a market in disequilibrium?

2. Chapter 6SectionMain Menu Price per slice Equilibrium Point Finding Equilibrium Price of a slice of pizza Quantity demanded Quantity supplied Result Combined Supply and Demand Schedule $.50300100 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $.50 Slices of pizza per day 0 50100150200250300350 Supply Demand The point at which quantity demanded and quantity supplied come together is known as equilibrium. $2.00 $2.50 $3.00 150 100 50 250 300 350 Surplus from excess supply $1.50200 Equilibrium Equilibrium Price a Equilibrium Quantity $1.00250150 Shortage from excess demand Balancing the Market

3. Chapter 6SectionMain Menu If the market price or quantity supplied is anywhere but at the equilibrium price, the market is in a state called disequilibrium. There are two causes for disequilibrium: Interactions between buyers and sellers will always push the market back towards equilibrium. Market Disequilibrium Excess Demand Excess demand occurs when quantity demanded is more than quantity supplied. Ex: Renner sells doughnuts @.25 ea Excess Supply Excess supply occurs when quantity supplied exceeds quantity demanded. Ex: today’s housing market

4. Chapter 6SectionMain Menu Sec. 2 Changes in Market Equilibrium How do shifts in supply affect market equilibrium? How do shifts in demand affect market equilibrium? How can we use supply and demand curves to analyze changes in market equilibrium?

5. Chapter 6SectionMain Menu Shifts in Supply Understanding a Shift –A change in supply will lead the market to a new equilibrium price and quantity sold. Excess Supply: “surplus” –If a surplus occurs, producers reduce prices to sell their products. This creates a new market equilibrium. A Fall in Supply –The opposite occurs: As supply decreases, producers will raise prices and demand will decrease.

6. Chapter 6SectionMain Menu Shifts in Demand Excess Demand creates a “shortage” –A shortage is a situation in which quantity demanded is greater than quantity supplied. A Fall in Demand –When demand falls, suppliers respond by cutting prices, and a new market equilibrium is found.

7. Chapter 6SectionMain Menu $800 $600 $400 $200 0 Price Output (in millions) Graph A: A Change in Supply 12345 Analyzing Shifts in Supply and Demand Graph A shows how the market finds a new equilibrium when there is an increase in supply. Graph B shows how the market finds a new equilibrium when there is an increase in demand. Original supply Demand a New supply b c Graph B: A Change in Demand Output (in thousands) $60 $50 $40 $30 $20 $10 0 900800700600500400300200100 Price Supply Original demand a New demand c b

8. Chapter 6SectionMain Menu The Great Tortilla Crisis: A sharp rise in the price of tortillas, a staple food of Mexico’s poor, which had gone from 25 cents a pound to between 35 and 45 cents a pound in just a few months in early 2007. Why were tortilla prices soaring? It was a classic example of what happens to equilibrium prices when supply falls. Tortillas are made from corn; much of Mexico’s corn is imported from the United States, with the price of corn in both countries basically set in the U.S. corn market. And U.S. corn prices were rising rapidly thanks to surging demand in a new market: the market for ethanol.

9. Chapter 6SectionMain Menu A recent drought in Australia reduced the amount of grass on which Australian dairy cows could feed, thus limiting the amount of milk these cows produced for export. At the same time, a new tax levied by the government of Argentina raised the price of the milk the country exported, thereby decreasing Argentine milk sales worldwide. These two developments produced a supply shortage in the world market, which dairy farmers in Europe couldn’t fill because of strict production quotas set by the European Union. Demand and Supply Shifts at Work in the Global Economy

10. Chapter 6SectionMain Menu Sec. 3 The Role of Prices What role do prices play in a free market system? What advantages do prices offer? What happens when prices are artificially set?

11. Chapter 6SectionMain Menu The Role of Prices in a Free Market Prices serve a vital role in a free market economy: Prices help move land, labor, and capital into the hands of producers, and finished goods into the hands of buyers. Prices create an efficient way to allocate (“distribute”) resources for producers (recall the 3 basic q’s of econ?) Create a language that both consumers and producers can use.

12. Chapter 6SectionMain Menu Prices provide a language for buyers and sellers. 1. Prices work as an Incentive Prices communicate to both buyers and sellers whether goods or services are scarce or easily available. Prices can encourage or discourage production. 2. Signals Think of prices as a traffic light. A relatively high price is a green light telling producers to make more. A relatively low price is a red light telling producers to make less. 3. Flexibility In many markets, prices are much more flexible than production levels. They can be easily increased or decreased to solve problems of excess supply or excess demand. 4. Price System is "Free" Unlike central planning, a distribution system based on prices costs nothing to administer. Advantages of Prices

13. Chapter 6SectionMain Menu In some cases the government steps in to control prices. These interventions appear as price ceilings and price floors. Price Ceilings A price ceiling is a maximum price that can be legally charged for a good. An example of a price ceiling is rent control, a situation where a government sets a maximum amount that can be charged for rent in an area.

14. Chapter 6SectionMain Menu Price Floors A price floor is a minimum price, set by the government, that must be paid for a good or service. One well-known price floor is the minimum wage, which sets a minimum price that an employer can pay a worker for an hour of labor.