Economics Chapter 6 Bringing Supply and Demand Together.

EconomicsEconomicsChapter 6Chapter 6

Bringing Supply Bringing Supply and Demand and Demand

TogetherTogether

Balancing the MarketBalancing the Market

The point at which quantity demanded

and quantity supplied come together is

known as equilibrium.

Market DisequilibriumMarket Disequilibrium

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:

Excess DemandExcess Demand

•Excess demand occurs when quantity demanded is more than quantity supplied.

Excess SupplyExcess Supply

•Excess supply occurs when quantity supplied exceeds quantity demanded.

Interactions between Interactions between buyers and sellers will buyers and sellers will always push the always push the market back towards market back towards equilibrium.equilibrium.

Government InterventionsGovernment Interventions

•In some cases the government steps in to control prices.

•These interventions appear as price ceilings and price floors.

Price CeilingPrice Ceiling

• 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.

Price FloorsPrice 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.

Changes in Market Changes in Market EquilibriumEquilibrium

•Shifts in Supply•Shifts in Demand

Changes in Market Changes in Market EquilibriumEquilibrium

• Shifts in Supply– Technology, Cost, Government,

Imports, Expectations, # of suppliers

• Shifts in Demand– Income, Expectations, Population,

Trends/Advertising, Substitutes, Complements

Shifts in SupplyShifts in Supply•Understanding a Shift

–Since markets tend toward equilibrium, a change in supply will set market forces in motion that lead the market to a new equilibrium price and quantity sold.

Excess SupplyExcess Supply–A surplus is a situation in which quantity supplied is greater than quantity demanded.

– If a surplus occurs, producers reduce prices to sell their products. This creates a new market equilibrium.

A Fall in SupplyA Fall in Supply

–The exact opposite will occur when supply is decreased.

–As supply decreases, producers will raise prices and demand will decrease.

Shifts in DemandShifts in Demand

Excess Demand

–A shortage is a situation in which quantity demanded is greater than quantity supplied.

•Search Costs–Search costs are the financial and opportunity costs consumers pay when searching for a good or service.

•A Fall in Demand–When demand falls, suppliers respond by cutting prices, and a new market equilibrium is found.

$800

$600

$400

$200

0

Pri

ce

Output (in millions)

Graph A: A Change in Supply

1 2 3 4 5

Analyzing Analyzing Shifts in Shifts in

Supply and Supply and DemandDemand

•This graph shows how the market finds a new equilibrium when there is an increase in supply.

Original supply

Demand

a

New supply

b

c

Analyzing Analyzing Shifts in Shifts in

Supply and Supply and DemandDemand

• This graph shows how the market finds a new equilibrium when there is an increase in demand.

Graph B: A Change in Demand

Output (in thousands)

$60

$50

$40

$30

$20

$10

0

900800700600500400300200100

Pri

ce

Supply

Original demand

a

New demand

c

b

The Role of PricesThe Role of Prices

The Role of Prices in a The Role of Prices in a Free MarketFree 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 in to the hands of buyers.

• Prices create efficient resource allocation for producers and a language that both consumers and producers can use.

Advantages of PricesAdvantages of Prices

Prices provide a language for buyers

and sellers.

4 Advantages:

1. Prices as an 1. Prices as an IncentiveIncentive

Prices communicate to both buyers and sellers whether goods or services are scarce or easily available.

Prices can encourage or discourage production.

2. Signals2. SignalsThink 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. Flexibility3. 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 4. Price System is "Free""Free"

Unlike central planning, a distribution system based on prices costs nothing to administer.

Efficient Resource Efficient Resource AllocationAllocation

•Resource Allocation–A market system, with its fully changing prices, ensures that resources go to the uses that consumers value most highly.

Market ProblemsMarket Problems

–Imperfect competition between firms in a market can affect prices and consumer decisions.

–Spillover costs, or externalities, are costs of production, such as air and water pollution, that “spill over” onto people who have no control over how much of a good is produced.

–If buyers and sellers have imperfect information on a product, they may not make the best purchasing or selling decision.

WhichWhichwaywaydoedoe

ss ititShift?Shift?

HamburgersHamburgers

Delivery truck gets in an Delivery truck gets in an accident and spills 1,000s of accident and spills 1,000s of

buns all over the freeway.buns all over the freeway.

Supply or Supply or Demand?Demand?

Pric

e

Quantity

StaplesStaples

The school district decides to The school district decides to not buy any more paper to use not buy any more paper to use

for copying in schools.for copying in schools.


Pric

e

Quantity

RosesRoses

February 15thFebruary 15th


Pric

e

Quantity

HammersHammers

The Federal Reserve Bank The Federal Reserve Bank lowers mortgage interest lowers mortgage interest

ratesrates


Pric

e

Quantity

Plane TicketsPlane Tickets

Flight attendants go on strike Flight attendants go on strike indefinitely, flights are indefinitely, flights are

cancelledcancelled


Pric

e

Quantity

SurfboardsSurfboards

A machine is designed that A machine is designed that can shape a board twice as can shape a board twice as

fast as by handfast as by hand


Pric

e

Quantity

Illegal drugsIllegal drugs

Federal agents seize hundreds Federal agents seize hundreds of tons of a substance on a of tons of a substance on a

boat headed for the USboat headed for the US


Pric

e

Quantity

Hockey GamesHockey Games

Players go on strike for the Players go on strike for the entire seasonentire season


Pric

e

Quantity

JobsJobs

Minimum wage is raised by a Minimum wage is raised by a dollar an hourdollar an hour


Pric

e

Quantity

Qualified WorkersQualified Workers

40% of college students drop 40% of college students drop out before they graduateout before they graduate


Pric

e

Quantity

BreadBread

The price of deli meat The price of deli meat increasesincreases


Pric

e

Quantity

CalciumCalcium

Study released showing Study released showing increased calcium helps burn increased calcium helps burn

fat more rapidlyfat more rapidly


Pric

e

Quantity

TissuesTissues

Shortage of flu vaccineShortage of flu vaccine


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e

Quantity

Extra CreditExtra Credit

Graduation is just a few Graduation is just a few months away!months away!


Pric

e

Quantity

Completed HomeworkCompleted Homework

Mrs. Halfen makes an Mrs. Halfen makes an assignment optionalassignment optional


Pric

e

Quantity

A high Economania BalanceA high Economania Balance

It’s the end of the semester It’s the end of the semester and you need a 99 on the and you need a 99 on the

personal finance test to pass personal finance test to pass the class and graduate.the class and graduate.


Pric

e

Quantity

BicyclesBicycles

The price of a gallon of gas The price of a gallon of gas goes over $3.00goes over $3.00


Pric

e

Quantity

T-shirtsT-shirts

Yet another school club Yet another school club decides to design and sell a decides to design and sell a

shirt.shirt.


Pric

e

Quantity

Good GradesGood Grades

Your parents see your report Your parents see your report cardcard


Pric

e

Quantity

TruantsTruants

The school hires extra police The school hires extra police officers to patrol the student officers to patrol the student

parking lotparking lot


Pric

e

Quantity

Economics Chapter 6 Bringing Supply and Demand Together.

Documents

market price

new equilibrium price

new market equilibrium

minimum price

maximum price

price ceilinga price

price floorsa price

price ceilings