Download Chapter 6.1 and 6.2 notes - Effingham County Schools

Chapter 6 notes – all sections
Price Adjustment Process
•
•
•
Market Equilibrium - a situation in which
prices are relatively stable, and Qs = Qd (S
and D cross)
Surplus – Qs > Qd; price tends to go down as
a result
Shortage – Qd > Qs; results in the price and
quantity supplied going up usually
Figure 8 The Equilibrium of Supply and
Demand
Price of
Ice-Cream
Cone
Supply
Equilibrium
Equilibrium price
$2.00
Equilibrium
quantity
0
1
2
3
4
5
6
7
8
Demand
9 10 11 12 13
Quantity of Ice-Cream Cones
Figure 9 Markets Not in Equilibrium
(a) Excess Supply
Price of
Ice-Cream
Cone
Supply
Surplus
$2.50
2.00
Demand
0
4
Quantity
demanded
7
10
Quantity
supplied
Quantity of
Ice-Cream
Cones
Figure 9 Markets Not in Equilibrium
(b) Excess Demand
Price of
Ice-Cream
Cone
Supply
$2.00
1.50
Shortage
Demand
0
4
Quantity
supplied
7
10
Quantity of
Quantity
Ice-Cream
demanded
Cones
Price Ceilings
• Maximum legal price that can be charged for
a product
• Example: rent control
• BELOW EQUILIBRIUM
• Causes a shortage
Price Floors
• Lowest legal price that can be paid for
something
• Example – minimum wage
• ABOVE EQUILIBRIUM
• Causes a surplus
Shifting Curves with S and D
• When a S or D curve shifts it will change the
Equilibrium Price and Quantity
Figure 10 How an Increase in Demand Affects the
Equilibrium
Price of
Ice-Cream
Cone
1. Hot weather increases
the demand for ice cream . . .
Supply
New equilibrium
$2.50
2.00
2. . . . resulting
in a higher
price . . .
Initial
equilibrium
D
D
0
7
3. . . . and a higher
quantity sold.
10
Quantity of
Ice-Cream Cones
Figure 11 How a Decrease in Supply Affects the
Equilibrium
Price of
Ice-Cream
Cone
S2
1. An increase in the
price of sugar reduces
the supply of ice cream. . .
S1
New
equilibrium
$2.50
Initial equilibrium
2.00
2. . . . resulting
in a higher
price of ice
cream . . .
Demand
0
4
7
3. . . . and a lower
quantity sold.
Quantity of
Ice-Cream Cones