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Equilibrium Price
 A. In the real world, demand and supply work
together.
 B. The price at which the supply meets the
demand—where the two curves intersect—is
the equilibrium price.
 What is the equilibrium price and why is it
important?
 The price at which supply and demand meet;
because it shows how the market works to
establish prices.
Shifts in Equilibrium Price
 A. If the demand curve shifts due to something other than
price, the equilibrium price will change.
 B. If the supply curve shifts due to something other than
price, the equilibrium price will change.
 Suppose that your jeans are at the equilibrium price.
There is suddenly a shortage of cotton in the world
market. What will happen to the demand curve, the
supply curve, and the equilibrium price?
 The supply curve will shift to the left, meaning that
less pairs of jeans will be produced. The demand
curve will remain the same. The price will go up.
Then the demand will decrease because the price
will have increased. Finally the equilibrium price will
be higher than before.
Prices Serve as Signals
 A. Rising prices signal producers to make more
and consumers to purchase less.
 B. Falling prices signal producers to make less and
consumers to purchase more.
 C. Shortages occur when the quantity demanded
(at equilibrium price) is greater than quantity
supplied.
 D. Surpluses occur when the quantity supplied (at
equilibrium price) is greater than quantity
demanded.
 E. Market forces can cause the prices to rise or fall
to correct shortages and surpluses.
Think of a situation in which it is
important that the government prevent
market forces from dealing with
shortages and surpluses.
 Ex. Katrina - In a natural disaster, such as a
flood, many people need water and food. At
such a time there is a shortage of clean water
for drinking. If government did not intervene,
market forces would cause the prices of water
(needed for basic human survival) to increase
to a point that many people could not afford it,
and they would be ill or die.
Price Controls
 A. Price ceilings are a maximum price set
by the government to prevent prices from
going above a certain level.
 B. Items in short supply might be rationed.
 C. Shortages can lead to a black market, or
illegal places to purchase such products at
exorbitant prices.
 D. Price floors are minimum prices also set
by the government to prevent prices from
going below a certain level.
 E. Price floors set minimum wage levels
and support agricultural prices.