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Chapter 6
Prices
Combining Supply and
Demand
Chapter 6, Section 1
Equilibrium
Equilibrium
 The point where supply and demand come
together is known as equilibrium
 In a market that is in equilibrium, prices
adjust to make quantity supplied and
quantity demanded equal
 Graphically this is the point where the
supply curve and demand curve intersect
Disequilibrium
 If the price, or quantity supplied, or
demanded is anywhere other than
equilibrium, the market is in
DISEQUILIBRIUM
 Excess Supply...more than is wanted (or
demanded)
 Excess Demand...more than is available (or
supplied)
Excess Demand
 With excess demand comes shortages
 Suppliers will raise the price as they see
that consumers want more
 As price goes up, demand will go down
and equilibrium will be reached
 As long as there is excess demand,
suppliers will continue to raise price
Excess Supply
 If the price is too high, markets will face
excess supply or a surplus.
 Consumers do not demand the good at
the higher price and may seek substitutes
or go without
 Suppliers will have to throw out products
or sell them very cheap.
 Suppliers lower price to meet demand
Reaching Equilibrium
 Whenever prices are flexible, forces of the
free market will push towards equilibrium
 Sellers will not waste extra resources on
excess supply, so they will drop prices
 This helps meet the demand of that good
 Prices will then move toward the equilibrium
level
Government Intervention
 Although market forces will push towards
equilibrium, the government may step in to
help regulate prices or markets
 Price Ceilings  Set below the equilibrium
price
 Price Floors  Will ensure sellers receive a
minimum reward for their efforts
Price Ceilings
 A maximum price that sellers can charge
for a good or service
 Price ceilings are placed on goods that
are considered essential
 Rent control...often used to help poor with
housing
 Some problems arise...there is excess
demand...how do we decide who gets what?
 Apartments are not kept up because landlords
have so many buildings
Price Floors
 Minimum price that must be paid for a good or
service
 Minimum Wage...set by federal government but
states can set higher
http://www.dol.gov/esa/minwage/america.htm
 Problems...if the minimum wage is set above
equilibrium, there will be a surplus of workers causing
an increase in unemployment
 Another reason to focus on education
 Price Floors have also been used in agriculture with
the government buying excess supply
Review
1. Equilibrium in a market means which of the following?
(a) the point at which quantity supplied and quantity demanded are
the same
(b) the point at which unsold goods begin to pile up
(c) the point at which suppliers begin to reduce prices
(d) the point at which prices fall below the cost of production
2. The government’s price floor on low wages is called the
(a) market equilibrium
(b) base wage rate
(c) minimum wage
(d) employment guarantee
Changes in Market
Equilibrium
Chapter 6, Section 2
Shifts in Supply
 A shift in the supply curve will change the
equilibrium price and quantity
 A shift in supply may result in a surplus or
shortage
 Surplus...excess supply
 Shortage...excess demand
 Eventually, prices will adjust until a new
equilibrium point is reached
Changes in Supply
 Often caused by
 Technology...new technologies increase
supply and lower price
 Input costs...rising input costs may decrease
supply and increase price
Shifts in Demand
 Sudden changes in demand often occur
with fads
 New toys around Christmas
 New Phones, Tablets, clothes, etc.
 This results in excess demand or
shortages and presents search costs
 Search costs...the financial and opportunity
costs of seeking a product
 Driving to two different stores because of a lower
price
Shifts in Demand
 Eventually, firms raise their prices,
increase supply and meet demand
OR
 The fad passes and excess demand
becomes excess supply and prices drop
Changes in Demand
 Caused by:
 Fads
 New goods that come out during certain times of
year
 Anticipation
 What do consumers think will happen in the
future?
Review
1. When a new equilibrium is reached after a fall in
demand, the new equilibrium has a
(a) lower market price and a higher quantity sold.
(b) higher market price and a higher quantity sold.
(c) lower market price and a lower quantity sold.
(d) higher market price and a lower quantity sold.
2. What happens when any market is in
disequilibrium and prices are flexible?
(a) Market forces push toward equilibrium.
(b) Sellers waste their resources.
(c) Excess demand is created.
(d) Unsold perishable goods are thrown out.
The Role of Prices
Chapter 6, Section 3
Prices
 Prices serve a vital role in the free market
 They move land, labor and capital into the
hands of producers and products to
consumers
 They are the driving force behind supply and
demand
Advantages of Prices
 They serve as an incentive
 Buyers and sellers are motivated by prices
 They are signals
 They tell about goods and future production
and spending
 They are flexible
 They can be easily changed to solve supply
and demand problems
 As compared to changing production
Supply Shock
 Supply shock is the term used to describe
a sudden shortage of a good
 Supply shocks are sometimes met with
rationing 
 A system used to distribute resources without
changing price
 Supply shock and rationing can lead to a
black market
Black Markets
 A black market is a market in which goods
are sold illegally
 Can be used to sell goods
 During times of ration
 That are illegal
 Landlord rents an apartment to a renter at a
government level but with “extra cash” payment
Market Problems
 Although markets strive to run efficiently
and there are many elements of the free
market that aid this, there are still
problems
 Cannot predict behaviors of people
 Not always ideal competition
 Spillover costs or externalities
 External elements of production paid by the
consumer
 Pollution, land use etc...
Review
1. What prompts efficient resource allocation in a wellfunctioning market system?
(a) businesses working to earn a profit
(b) government regulation
(c) the need for fair allocation of resources
(d) the need to buy goods regardless of price
2. How do price changes affect equilibrium?
(a) Price changes assist the centrally planned economy.
(b) Price changes serve as a tool for distributing goods and services.
(c) Price changes limit all markets to people who have the most money.
(d) Price changes prevent inflation or deflation from affecting the supply of
goods.