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Demand, Supply, and
Prices
Chapter 6: Demand, Supply,
and Prices
 KEY

CONCEPT
The equilibrium price is the price at which
quantity demanded and quantity supplied are
the same.
 WHY

THE CONCEPT MATTERS
In a market economy, the forces of demand
and supply work together to set a price that
buyers and sellers find acceptable.
The Interaction of
Demand and Supply
Section 1
Reaching the Equilibrium Price
 KEY

CONCEPTS
Trial and error may be necessary for market
to arrive at equilibrium
• Market may have surplus—more quantity supplied
than demanded
• Market may have shortage—more quantity
demanded than supplied
Reaching the Equilibrium Price

EXAMPLE: Holiday
Toys


Marketers sometimes
overestimate popularity,
others underestimate
Tickle Me Elmo doll introduced
for holidays in 1996
• at first sold slowly at $30;
seemed stores would
have surplus
• fad caught on; shortage
developed, price went up
• by spring, supply doubled;
demand decreased, price
dropped to $25
In Class Paired Activity





Create a Market and Demand Curve for a common
product.
Choose a product that all members purchase regularly.
One member represent the customer and draw the
demand for a product. The other student represent the
producer and draw the supply curve.
Combine your curves and label equilibrium price,
surplus, and shortage.
Volunteers will be invited to share their interaction
between supply and demand.
Prices as Signals and
Incentives
Section 2
How the Price System Works
 KEY

CONCEPTS
Competitive pricing —selling products at
lower prices than others
• lures customers away from rival producers
• maintains overall profits by selling more units
Prices Motivate Producers and
Consumers
 KEY



CONCEPTS
Prices motivate consumers and producers in
different ways
Incentive encourages people to take a certain
action
In price system, incentives move producers
and consumers
• both act in ways consistent with own best interests
Reviewing Key Concepts
 Use
each of the terms below in a sentence
that illustrates the meaning of the term:


competitive pricing
incentive
Intervention in the Price
System
Section 3
Imposing Price Ceilings
 KEY


CONCEPTS
Government interferes to keep some prices
from going too high
Price ceiling —legal maximum price a seller
may charge for a product
• set below the equilibrium price, so shortage results
Setting Price Floors
 KEY



CONCEPTS
Government intervenes to increase income to
certain producers
Price floor —legal minimum price buyers may
pay for product
Various programs protect agricultural
products
• encourage farmers to produce abundant supply of
food
Discussion Question
 What
is the Black Market?
 Why does it exist?
Rationing Resources and
Products
 KEY



CONCEPTS
In national emergency, government may
distribute products, resources
Rationing —way of allocating products using
factors other than price
Black market —illegal buying and selling of
products
• violates price controls, rationing
Concert Tickets
 TicketMaster
has a plan to introduce an
auction for concert tickets.
 The company is tired of scalpers make
huge money from their product.
 What is your prediction on how this
strategy could lead to equilibrium prices?
Reviewing Key Concepts
 Explain
the relationship between the terms
in each of these pairs:


price floor and minimum wage
rationing and black market