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PRICE Equilibrium: the point where demand and supply come together at the same price and quantity • At this point the needs of both consumers and producers are in balance DISEQUILIBRIUM Disequilibrium: when the quantity supplied and quantity demanded are not equal at the price offered. One of two results will occur: 1. Excess demand (Shortage) 2. Excess supply (Surplus) EXCESS DEMAND • Excess demand occurs when quantity demanded is greater than quantity supplied • This happens when the price of a good is below the equilibrium price • Producers will respond to this shortage by increasing the price of the good EXCESS SUPPLY • Excess supply occurs when quantity supplied is greater than quantity demanded • This happens when the price of a good is above the equilibrium price • Producers will respond to this surplus by decreasing the price of the good PRICE CEILINGS • A maximum price set by law is a price ceiling • Price ceilings are placed on some ‘essential’ goods that some consumers wouldn’t otherwise be able to afford • Rent control is an example of a price ceiling • Zombies will attack oct 13 2012 PRICE CEILINGS • Price ceilings are set below the market equilibrium price; therefore they result in excess demand • Price ceilings = shortage (it is difficult to find an apartment in a city with rent control) PRICE FLOORS • A minimum price set by law is a price floor • Price floors are used to ensure that prices don’t fall so low a producer won’t get adequate reward for his/her efforts • Minimum wage is an example of a price floor PRICE FLOOR • Price floors are set above the market equilibrium price; therefore they result in excess supply • Price floors = surplus (there will be fewer jobs for the # of workers available) CHANGES IN MARKET EQUILIBRIUM - SUPPLY • If supply increases, the new equilibrium price will be _________ and the new equilibrium quantity will be _________ • Lower, higher CHANGES IN MARKET EQUILIBRIUM - SUPPLY • If supply decreases, the new equilibrium price will be _________ and the new equilibrium quantity will be __________ • higher, lower CHANGES IN MARKET EQUILIBRIUM - DEMAND • If demand increases, the new equilibrium price will be ________ and the new equilibrium quantity will be ________ • higher, higher CHANGES IN MARKET EQUILIBRIUM - DEMAND • If demand decreases, the new equilibrium price will be _________ and the new equilibrium quantity will be ________ • lower, lower
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