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The Price System at Work 1-What are economic models used for? To analyze behavior and predict outcomes 2-What is the equilibrium price? When the supply and demand curves intersect: the price at which the number of units produced equals the number of units sold. There is neither a surplus nor a shortage of the product in the market. https://www.youtube.com/watch?v=7eZcPs 9z9OA 3-What is a surplus? When the quantity supplied is larger than the quantity demanded, the difference between them is called excess supply. This creates a SURPLUS. 4-What can we assume about price based on the size of a surplus? It will go down. 5-What is a Shortage? When the quantity demanded is larger than the quantity supplied, the difference between them is called excess demand. This creates a SHORTAGE. 6-What will happen to the price and quantity supplied in the next trading period as a result of a shortage? Both will go up. 7-What tends to happen to the market once the equilibrium price has been reached? The market will clears, by leaving neither a shortage nor a surplus Price ceiling [keeps prices lower] A maximum legal price that can be charged for a product. Could lead to a shortage/Rent control Price floor [keeps prices higher] The lowest legal price that can be paid for a good or service Minimum wage PRICE CEILINGS A price ceiling is a government- imposed limit on the highest price firms can charge in a market. A price ceiling will cause a SHORTAGE. https://www.youtube.com/watch?v=R0h8kfA4i_A&index=9&list=PL-JlTsnpBVIESkJLqQ_SPfuQ_rIh3ttDR PRICE FLOORS A price floor is a government- imposed limit below which prices cannot fall. Price floors tend to cause a SURPLUS. Example- milk, minimum wage