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Ch 6.1
Combining Supply and Demand
Balancing the Market
• EQUILIBRIUM
demand and supply
– The point where _______________________come together at
the same number is called equilibrium. It is the point of balance
price and quantity At this point, the market for a good
between_______________.
is stable.
• DISEQUILIBRIUM
– If the market price or quantity supplied is anywhere but at the
equilibrium, the market is in a state that economists call
disequilibrium
_______________.
This occurs when quantity supplied is
not equal
___________________to
quantity demanded. Disequilibrium
either produces excess demand or excess supply.
Excess Demand
• The problem of excess demand occurs when
more
quantity demanded is _____
than quantity
supplied
________.
When the actual price in the market
below
is ________
the equilibrium price you have
excess demand, because a low price
discourages sellers
encourages buyers and________________.
As
long as there is excess demand and the quantity
demanded exceeds the quantity supplied,
raising the price
suppliers will keep __________to
meet
equilibrium.
Excess Supply
too high then the
• If the price of a good is_______,
excess supply
market will face a problem of__________.
Excess supply occurs when quantity
supplied exceeds quantity demanded.
Whenever the market is in disequilibrium
and prices are flexible, market forces will
equilibrium
push the market toward the___________.
Sellers do not like to waste their resources
on excess supply, particularly when the
goods cannot be stored for long.
Government Interventions
• Price Ceilings
maximum price
– A pc is a _____________set
by law that
sellers can charge for a good or service.
These are placed on goods that are
considered “essential”. Ex. Rent,
______
• Price Floors
minimum price
– A pf is a______________,
set by the
government, that must be paid for a good or
Minimum wage, milk
service. Ex. _________________
Ch 6.2
Changes in Market Equilibrium
Changes in Price
technology
• Advances in___________,
new government
taxes and subsidies, and changes in the prices
raw materials
of ____________and
labor used to produce the
good
• Shift in Supply : see figure 6.5 (p. 134)
– Give an example of a technology that was expensive
& hard to find – but is now cheaper & easy to
get…this is a shift in supply
– Surplus: when quantity supplied exceeds quantity
demanded
• Give an example of something that everyone wanted 5 years
ago that no one wants today…
Fall in Supply
• Shifts to the______
left
• With this shift equilibrium will also change.
With the shift to the left, suppliers
raise their prices
___________________and
the quantity
demanded falls.
Shifts in Demand
• The Christmas FRENZY!! Fads &
consumer taste & advertising…
• Shortage: quantity demanded is
_________
than quantity supplied (excess
greater
demand)
• Search cost: the financial and
opportunity cost
________________consumer
pay when
searching for a good or service…ex.
Expedia v. travel agent
Fall in Demand
left
• Demand shifts _____
cutting prices
• Suppliers respond by ____________
on
their inventory.
Michael Dell
• As a teen, Dell saw a future in personal computers.
During his freshman year at the University of Texas, he
sold PC’s from his dorm room. Business was so good
that he quit school the next year and with 1K started a
company. Fifteen years later, Dell Computer corporation
was a 19.9 BILLION dollar business with more than $18
million a day in sales on its internet site. Dell’s vision
was to sell directly to the consumer and allow customers
to customize their needs. He could also sell for less. He
also did not have to maintain warehouses of unsold
goods since each computer was custom made. In 1996
Dell became on e of the first manufacturers to offer
products via the Internet.
You Decide
• Explain how the equilibrium price and
quantity sold of eggs will change in the
following cases & graph each one:
– An outbreak of food poisoning is traced to
eggs
– Scientists breed a new chicken that lays twice
as many eggs each week
– A popular talk show host convinces her
viewers to eat an egg a day
WARM-UP
Write 5 cause effect statements which
include supply/demand.
Ex: Hot weather leads to greater demand
for air conditioners with leads to higher
prices which leads to a greater supply.
Ch 6.3
The Role of Prices
Prices in the Free Market
• Prices can move markets toward
equilibrium and solve problems of
excess supply
_______________
and excess demand
Advantages of Prices
• Price as an Incentive
– Price signals if an item is in short supply or readily
available
• Prices as Signals
– Red light: low price – low demand; a good is being
overproduced, so producers should make another
product.
– Green light: high price – high demand so they
should produce more. New suppliers will join the
market.
• Flexibility
sudden shortage
– Supply shock:______________
• creates excess demand (gas, wheat)
– Raising prices is the quickest way to decrease demand
– Rationing: dividing up goods/services using criteria
other than price (ex. WWII)
• Pricing is Free – based on consumers
– Unlike central planning, a distribution system based
on prices costs nothing to administer. Free market
pricing distributes goods through millions of decisions
made daily by consumers and suppliers.
Wide Choice of Goods
• Rationing
• Shortages
• The Black market: When people conduct
business without regard for government
controls on price or quantity
Price and the Profit Incentive
• Efficient resource allocation occurs
naturally in a market system as long as the
system works reasonably well.
Landowners tend to use their scarce
property in the most profitable manner.
Workers usually move toward high-paying
jobs, and capital will be invested in the
firms that pay the highest returns.
The Wealth of Nations
• Businesses prosper by finding out what
people_____,
then providing it.
want
Spillover costs
Externalities
• ____________that
include costs of
production such as air and water pollution
• This spills over onto people who have
______________
over how much of a
no control
good is produced
• Producers don’t have to pay spillover
costs so they will keep producing while
these extra costs will be paid by
consumers
_______________.
Real Life Case Study
• Get into 5 groups
• I will assign one of the following case studies to
you
–
–
–
–
–
p. 97 What is an Entrepreneur
P. 121 Professional Baseball
P. 145 Beanie Babies
P. 205 Business and Ethics
P. 235 US Improve Working Conditions
Create a chart explaining the study & answering the
questions
• Get ready to present!