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Chapter 6: Prices
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Section 1: Combining Supply & Demand

free markets using the interaction of supply & demand usually work best w/o gov’t intervention
Balancing the Market
● demand schedule shows how much consumers willing to buy at given prices
● supply schedule shows how much firms willing to sell at given prices
Equilibrium—point at which quantity demanded & quantity supplied are equal
○ occurs at point where consumers willing to buy same amount producers willing to produce
 occurs only at 1 price & 1 quantity
Disequilibrium—describes an price or quantity not at equilibrium; when quantity supplied is not
equal to quantity demanded in a market
Excess Demand—quantity demanded is more than quantity supplied
 usually when prices are low
Excess Supply—quantity supplied is more than quantity demanded
 usually when prices are high

PIZZA EXAMPLE

economies will naturally tend towards equilibrium, but gov’t sometimes still decides to get
involved, at which point usually disturbs the natural equilibrium
Price Ceiling—max price allowed by law
Price Floor—minimum price allowed by law


● price ceilings established to help those less fortunate to ensure they will be able to afford the
necessary basic
o RENT CONTROL limits apartment rents in poor sections of cities
o problems arose since supply then low & many denied any housing & abuse by rich
o rent control in the long run will not fix the problems
● price floors are established to ensure a minimum price is met to protect those less fortunate
o minimum wage instituted to help protect people w/ low paying jobs
o results in some being given more money, but many others losing all jobs
o gov’t helps agriculture whenever price drops too low by buying excess to raise the price
of the goods
Chapter 6: Prices
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Section 2: Changes in Market Equilibrium
● excess supply will force firms to lower their prices & excess demand will allow firms to raise
their prices meaning that THE MARKET WILL ALWAYS TEND TOWARD THE
NATURAL POINT OF EQUILIBRIUM
Shifts in Supply
● shifts in the supply curve can be caused by advances in technology, gov’t taxes & subsidies, &
changes in prices of raw materials & labor (CD players, camcorders, Nintendos)
● shift of supply curve causes new equilibrium prices since when prices go up some will not be
willing to buy that were willing before & when prices go down some will be willing to buy that
were not before
Surplus—situation in which quantity supplied is greater than quantity demanded (excess supply)
● if firms fail to lower their prices then they will produce unsold inventory
● supply curve constantly changing so firms try to find that right price (sales)
● supply curve can shift to the left as well, causing quantity to drop but prices to rise

THE EQUILIBRIUM POINT IS NOT FIXED; INSTEAD IT CAN MOVE
CONSTANTLY AS PRODUCERS & CONSUMERS SEEK TO MAXIMIZE THEIR
OWN SELF-INTEREST
Shifts in Demand
● demand curves can shift based on changes in consumer demand (HOT TOYS AT
CHRISTMAS TIME)
● shortage occurs when quantity demand exceeds quantity supplied; excess demand
 GIVE EXAMPLES OF BOTH SUPPLY & DEMAND SHIFTS
Search Costs—financial & opportunity costs consumers pay when searching for a good or service
● increased consumer demand actually drives up the prices for themselves
● when demand drops, consumers respond in the opposite manner, lowering prices
Chapter 6: Prices
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Section 3: The Role of Prices
● prices are a tool for distributing goods & resources efficiently
● prices allow consumers to shop around for their best deal
Advantages of Prices
1. Price as an Incentive—prices can encourage or discourage people from buying or selling
2. Prices as Signals—prices tell consumers what to buy & producers what to produce
3. Flexibility—price can be adjusted much quicker than the quantity of products
4. Price System is “free”—market is self-regulating so doesn’t cost money to control prices
Supply Shock—sudden shortage of goods
Rationing—system of allocating scarce goods & services using criteria other than price
● price-driven economies allow for a variety of goods as producers compete for the consumer
spending $
o centrally planned economies generally have few choices in products
● both the US & Soviet Union faced shortages & rationing during WWII
o both suffered w/ gov’t intervention, but the US recovered much quicker
 GOV’T INTERFERENCE ALWAYS THROWS OFF THE NATURAL INTERACTION
OF SUPPLY & DEMAND
Black Market—market in which goods are sold illegally
● everybody acts in their own self-interest, driving the economy to be efficient
● however, people do not have their job as a butcher or farmer or doctor to help people…they do
so because it gets them what they need
Market Problems
1. Imperfect competition can inflate prices
2. Externalities, or spillover costs, lowers the costs of production by making others pay for the
products someone else is producing (everyone pays for pollution caused by pesticides used to
make crops cheaper for those who buy them)
3. Imperfect information can cause individuals to make decisions that are not right for them

DISCUSS THE SUCCESS OF BEANIE BABIES & HARLEY DAVIDSON THROUGH
THEIR ABILITY TO REGULATE SUPPLY & DEMAND FOR THEIR PRODUCTS