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Combining Supply and Demand
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Ch 6.1
2
Balancing the Market
The point at which quantity demanded and
quantity supplied come together is known as
equilibrium.
Finding Equilibrium
Equilibrium Point
Combined Supply and Demand Schedule
$3.50
$2.50
Equilibrium
Price
$2.00
$1.50
$1.00
$.50
Supply
0
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50
a
Equilibrium
Quantity
Price per slice
$3.00
Price of
a slice
of pizza
Quantity
demanded
Quantity
supplied
$1.00
$ .50
250
300
150
100
$1.50
200
200
$2.00
150
250
$2.50
100
300
$3.00
50
350
Demand
100 150 200 250 300
Slices of pizza per day
Result
Shortage from
excess demand
Equilibrium
Surplus from
excess supply
350
Ch 6.1
3
Market Disequilibrium
If the market price or quantity
supplied is anywhere but at the
equilibrium price, the market is in a
state called disequilibrium.
There are two causes for
disequilibrium:
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Market Disequilibrium
1. Excess Demand (shortage)
 Excess demand occurs when
quantity demanded is more than
quantity supplied.
2. Excess Supply (surplus)
 Excess supply occurs when quantity
supplied exceeds quantity demanded.
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Ch 6.1
5
Market Disequilibrium
Interactions between buyers and
sellers will always push the market
back towards equilibrium.
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Price Ceilings
In some cases the government
steps in to control prices. These
interventions appear as price
ceilings and price floors.
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Price Ceilings
A price ceiling is a maximum price that can be
legally charged for a good.
 An example of a price ceiling is rent control,
where a government sets a maximum amount
that can be charged for rent in an area.

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Price Floors
A
price floor is a minimum price, set by the
government, that must be paid for a good or
service.
 Ex.
minimum wage, which sets a minimum
price that an employer can pay a worker for
an hour of labor.
What is the impact of changing
the minimum wage?
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Ch 6.1
9
Minimum Wage - The Supply & Demand for Labor
D
S
Unemployment
New
Minimum wage
surplus supply
$7.75
Price
Equilibrium
price & quantity
$7.50
$7.25
Current
minimum wage
surplus demand
A B
C
Quantity
Shifts in Supply
 Understanding
a Shift
 Since markets tend toward
equilibrium, a change in supply will
set market forces in motion that lead
the market to a new equilibrium price
and quantity sold.
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Ch 6.2
11
Shifts in Supply
Excess Supply
 A surplus is a situation in which
quantity supplied is greater than
quantity demanded.
 If a surplus occurs, producers reduce
prices to sell their products. This
creates a new market equilibrium.
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Ch 6.3
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Shifts in Supply
A
Fall in Supply
 The exact opposite will occur when
supply is decreased. As supply
decreases, producers will raise prices
and demand will decrease.
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Shifts in Demand
 Excess
Demand
 A shortage is a situation in which
quantity demanded is greater than
quantity supplied.
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Ch 6.2
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Shifts in Demand
A
Fall in Demand
 When demand falls, suppliers respond
by cutting prices, and a new market
equilibrium is found.
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Ch 6.2
15
Analyzing Shifts in Supply and Demand
Graph A: A Change in Supply
Graph B: A Change in Demand
$800
$60
a
Supply
$50
b
Original
supply
$40
c
Price
Price
$600
$400
c
$30
a
b
$20
$200
New
supply
Demand
New
demand
Original
demand
$10
0
1
2
3
4
0
5
100
Output (in millions)

200
300
400
500
600
700
800
900
Output (in thousands)
Graph A shows how the market finds a new equilibrium when
there is an increase in supply.
Graph B shows how the market finds a new equilibrium when
there is an increase in demand.
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Shifts in Demand
 Search
Costs
 Search costs are the financial and
opportunity costs consumers pay
when searching for a good or service.
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Ch 6.2
17
The Role of Prices in a Free
Market
 Prices
serve a vital role in a free
market economy.
 Prices help move land, labor, and
capital into the hands of producers,
and finished goods in to the hands of
buyers.
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The Role of Prices in a Free
Market
 Prices create efficient resource
allocation for producers in a
language that both consumers and
producers can use.
(the invisible hand)
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Advantages of Prices
Prices provide a language for buyers
and sellers.
1. Prices as an Incentive
Communicate to both buyers and
sellers whether goods or services are
scarce or easily available. Encourage or
discourage production.
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Advantages of Prices
2. Signals
Think of prices as a traffic light. A
relatively high price is a green light
telling producers to make more. A
relatively low price is a red light telling
producers to make less.
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Advantages of Prices
3. Flexibility
In many markets, prices are much
more flexible than production levels.
They can be easily increased or
decreased to solve problems of excess
supply or excess demand.
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Advantages of Prices
4. Price System is "Free"
Unlike central planning, a distribution
system based on prices costs nothing
to administer.
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Efficient Resource Allocation
 Resource
Allocation
 A market system, with its fully
changing prices, ensures that
resources go to the uses that
consumers value most highly.
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Efficient Resource Allocation
 Market
Problems
 Imperfect competition can affect
prices and consumer decisions.
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Efficient Resource Allocation
 Market
Problems
 Spillover costs, or externalities, are
costs of production, such as air and
water pollution, that “spill over” onto
people who have no control over how
much of a good is produced.
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Efficient Resource Allocation
 Market
Problems
 If buyers and sellers have imperfect
information on a product, they may
not make the best purchasing or
selling decision.
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