Download Principles of Economics

Principles of
Economics
(Condensed version)
Chapter 6: Prices
(Equilibrium)
El Dorado High School
Spring, 2015
Mr. Ruiz
Terms you need to know:
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Equilibrium
Disequilibrium
Excess demand
Excess supply
Price floor
Price ceiling
Minimum wage
Rent control
Balancing the Market
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Supply and Demand work
together to create A
BALANCE (a PRICE that
everyone can agree on)
Remember:
A Demand Schedule shows how
much consumers are willing to buy at
various prices.
 A Supply Schedule shows how much
sellers are willing to sell at various
prices
Comparing these two schedules will
allow us to find common ground for the
two sides of the market
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Defining Equilibrium
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Equilibrium: The point at which quantity demanded and
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quantity supplied are equal (i.e., a point of balance between Price
and Quantity)
Demand Curve
Equilibrium
Supply Curve
Disequilibrium
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Disequilibrium occurs when quantity supplied is not equal to quantity
demanded in a market.
Disequilibrium (Excess Demand)
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Excess demand occurs when quantity demanded is
more than the quantity supplied.
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When excess demand exists, you end up with a shortage in quantities supply.
Above:
A drought in China leads to severe water
shortage for the citizens of this agricultural
community in southeast China.
Disequilibrium (Excess Supply)
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Excess Supply occurs when quantity supplied
is more than quantity demanded.
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When excess supply occurs you end up with a surplus in quantities
supplied.
Above:
This surplus of tomatoes in Spain is an example of the hundreds
of thousands of tons of foods that spoil and are thrown away as a
result of bad agricultural planning and lack of government
subsidizing programs.
Government Intervention
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Equilibrium is normally achieved
through the market forces; however, on
occasion the government is expected to
intervene to control prices.
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The government can impose:
Price ceiling: A maximum price that
can be legally charged for a good
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The government will usually impose price
ceilings on what are considered essential
and may become to expensive for
customers.
Price Floor: A minimum price for a
good or service
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The government sets price floors when it
wants some sellers to receive some
minimum reward for their efforts.
Ex. Minimum Wage
Section Two
Changes in
Market Equilibrium
Terms you need to know:
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Surplus
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Shortage
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Search Costs
Changes in Price
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When a supply or demand curve
shifts, a new equilibrium occurs.
The market price and quantity
sold move toward the new
equilibrium.
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Brief Explanation:
 Market equilibrium occurs at
the intersection of a demand
curve and supply curve. If
either the entire supply or
demand curves were to shifted
either to the left or to the right,
it would cause a change in
equilibrium price and quantity.
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A Fall in Supply
New technology/ lower costs can shift
the supply curve to the right; however,
other factors can reduce supply and
shift the supply curve to the left.
 Examples:
If the price of steel rises
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Automobile manufacturers will
produce fewer cars at all price levels
The supply curve will shift to the left
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When the supply curve shifts to the
left, the equilibrium price and quantity
sold will change as well.
Shifts in Demand
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Sudden increases/decreases in demand not
particularly associated with price.
Examples:
 Consumer taste, advertising, behavior, etc.
Rapid rightward/leftward shifts could indicate
the impact of outside forces on the market’s
equilibrium norm.
Examples:
 Natural disaster, War, Scarcity of
particular resources, technology
Problem with excess demand:
Shortage: situation in which quantity
demanded is greater than the quantity
supplied.
Search cost: The financial and opportunity
cost consumers pay when searching for a good
or service.