1. SSEMI2 THE STUDENT WILL EXPLAIN HOW THE LAW OF DEMAND, THE LAW OF SUPPLY, PRICES, AND PROFITS WORK TO DETERMINE PRODUCTION AND DISTRIBUTION IN A MARKET ECONOMY.

2. MARKET CLEARING (EQUILIBRIUM) PRICE The student will be able to describe how buyers and sellers determine market clearing (equilibrium) price. The buyer’s demand curve in a market is determined by adding together all the quantities consumers are willing and able to purchase at each price in the market. The seller’s supply curve in a market is determined by adding together all the quantities producers are willing and able to sell at each price in the market.

3. MARKET CLEARING (EQUILIBRIUM) PRICE The market clearing or equilibrium price is found at the intersection of the market demand and supply curves. This is the point at which the quantity demanded by consumers is equal to the quantity supplied by producers. On the graph below, the equilibrium price is shown at Ep and the equilibrium quantity is shown at Eq.

4. MARKET CLEARING (EQUILIBRIUM) PRICE Equilibrium price and quantity can also be determined by looking at demand and supply schedule charts. Here is an example using the burger chart from the last element with the quantities supplied and demanded included:

5. MARKET CLEARING (EQUILIBRIUM) PRICE In the schedule shown above, the market clearing price (equilibrium price) is $2.25 because this is the price at which the quantity supplied equals the quantity demanded in the market.

6. SSEMI3 THE STUDENT WILL EXPLAIN HOW MARKETS, PRICES, AND COMPETITION INFLUENCE ECONOMIC BEHAVIOR. B. EXPLAIN AND ILLUSTRATE ON A GRAPH HOW PRICE FLOORS CREATE SURPLUSES AND PRICE CEILINGS CREATE SHORTAGES.

7. PRICE CONTROLS 1.governments sometimes view the equilibrium price in a market as too high or too low. 2.government price controls include price floors and price ceilings. 3.Government price controls occur when a local, state, or national government decides to set a legal maximum or legal minimum price in a market for a good or service

8. PRICE FLOORS 1. Price Floors: A price floor is a legal minimum price for a good, service, or factor of production. 2. Charging or paying a price below the price floor is illegal and can carry a penalty under the law. 3. most familiar price floor is the minimum wage. In the United States, it is illegal to pay workers less than $7.25 per hour. 4. Price floors create a surplus in the market. 5.The government’s argument for a minimum wage stems from a belief that the market wage is not high enough to provide a reasonable standard of living for low skilled workers.

9. SURPLUS 1.Surplus: A surplus occurs when the quantity supplied of a good is greater than the quantity demanded of the good. 2.Price floors typically create a surplus because the government price is set above the equilibrium price in the market and consumers do not want to pay a price higher than what they think the good is worth.

10. PRICE CEILINGS 1. Price Ceilings: A price ceiling is a legal maximum price for a good, service, or factor of production. 2. The most familiar price ceiling is the rent control. 3. In order to ensure that some housing is available to lower income people, the city designates some housing units as rent control units. Owners of these units cannot legally rent the units at price higher than the price ceiling. 4. Price ceilings usually create shortages in the market.

11. SHORTAGE 1. Shortage: A shortage occurs when the quantity supplied of a good is less than the quantity demanded of the good. 2. Price ceilings typically create a shortage because the government price is set below the equilibrium price in the market and sellers do not want to sell at a price lower than what they think the good is worth.

12. PROBLEMS WITH PRICE CONTROLS 1. Problems with price controls: Price controls will often create underground markets. 2. If the price floor minimum wage is truly too high for the market to bear, both workers and employers will choose to trade in the underground market. 3. This is bad for government because it will not collect taxes on that income earned and it will have to spend resources to enforce the price floor. 4. Eventually, the number of rent controlled units will decline as frustrated landlords convert their buildings to condominiums or sell off their property for alternative uses.

13. Equilibrium wage in the market for labor is $5.15 per hour and there are 1000 workers employed at this wage. Government price floor (minimum wage) is set at $7.25 per hour. At a wage of $7.25 per hour, employers only demand a quantity of 500 workers while there are 1500 workers who want to work at $7.25 per hour. This wage creates a surplus of 1000 workers in the market [1500 (Quantity Supplied) – 500 (Quantity demanded)].

14. Equilibrium rent in the market for apartments is $700 per month and there are 1000 unit available at this rent. The government price ceiling (rent control) is set at $500 per month. At a rent of $700 per month, there are 1000 units tenants willing to rent and 1000 units landlords are willing to rent to them. At a rent of $500 per month landlords are only willing to supply a quantity of 500 workers units while there are 1500 units tenants want to rent. This price ceiling rent creates a shortage of 1000 units in the market [1500 (Quantity Demanded) – 500 (Quantity supplied)].

15. SSEMI3 THE STUDENT WILL EXPLAIN HOW MARKETS, PRICES, AND COMPETITION INFLUENCE ECONOMIC BEHAVIOR. C. DEFINE PRICE ELASTICITY OF DEMAND AND SUPPLY.

16. PRICE ELASTICITY Price elasticity of demand refers to the responsiveness of consumers to changes in price. Market demand is inelastic when the percentage change in the price of a good is greater than the percentage change in quantity demanded of the good. For example, if a diabetic needs insulin in order to live, they are likely to purchase just as much even if the price rises significantly.

17. DEMAND ELASTICITY Market demand is elastic when the percentage change in the price of a good is less than the percentage change in quantity demanded of the good. For example, if the price of snack you buy goes up, you will likely buy a much smaller quantity because you immediately substitute another snack for it since you have so many choices.

18. SUPPLY ELASTICITY Market supply is inelastic when the percentage change in the price of a good is greater than the percentage change in quantity demanded of the good. We expect producers to be motivated to supply a greater quantity when price rises. However, some producers may be unable to respond to the increase in price. For example, a freelance journalist working from home may want to write ten more articles a week when the price of freelance pieces rises, unfortunately she may not be able to respond because she lacks the hours in the day to produce the quantity

19. SUPPLY ELASTICITY Market supply is elastic when the percentage change in the price of a good is less than the percentage change in quantity demanded of the good. For example, if a company has a factory and it is currently operating at 70% of its capacity and the price of its product rises in the market, it can utilize some of its excess capacity quickly to take advantage of the higher prices

20. INELASTIC DEMAND What does inelastic demand look like graphically? The first graph shows relatively inelastic demand which means a price change on the demand curve results in a very small change in quantity demanded. The second graph shows perfectly inelastic demand which means a price change on the demand curve results in no change in quantity demanded

21. ELASTIC DEMAND What does elastic demand look like graphically? The first graph shows relatively elastic demand which means a price change on the demand curve results in a very large change in quantity demanded. The second graph shows perfectly elastic demand which means any price increase or decrease no longer intersects the demand curve and there is no quantity demanded at any other price.

22. INELASTIC SUPPLY What does inelastic supply look like graphically? The first graph shows relatively inelastic supply which means a price change on the supply curve results in a very small change in quantity supplied. The second graph shows perfectly inelastic supply which means a price change on the supply curve results in no change in quantity supplied.

23. ELASTIC SUPPLY What does elastic supply look like graphically? The first graph shows relatively elastic supply which means a price change on the supply curve results in a very large change in quantity supplied. The second graph shows perfectly elastic supply which means any price increase or decrease no longer intersects the supply curve and there is no quantity supplied at prices higher or lower than the current price.