Chapter 6: PricesSection 1: Combining

Supply & Demand

The market system makes certain that consumers can buy products they want, that sellers make enough profit to stay in business & that sellers respond to changing needs & tastes of consumers

The demand schedule shows how much consumers are willing to buy at various prices

Supply schedule shows how much sellers are willing to sell at various prices

Balancing the Market

Comparing these schedules should allow us to find common ground for the two sides of the market

Point where demand & supply come together at the same number

Market for a good is stableQuantities supplied & demanded will be equal at only one price & one quantity

Defining Equilibrium

Pric

e pe

r sl

ice

Equilibrium Point

Finding Equilibrium

Price of a slice

of pizza

Quantity demande

d

Quantity supplied Result

Combined Supply and Demand Schedule

$ .50 300 100

$3.50

$3.00

$2.50

$2.00

$1.50

$1.00

$.50Slices of pizza per day

0 50 100 150 200

250 300 350

Supply Demand

$2.00

$2.50

$3.00

150

100

50

250

300

350

Surplus from excess supply

$1.50 200 200 Equilibrium

Equilibrium Price

a

Equi

libriu

m

Quan

tity

$1.00 250 150Shortage from excess demand

Balancing the Market

If the market price or quantity supplied is anywhere but at equilibrium

Can produce either excess demand or supply

Disequilibrium

Quantity demanded is more than quantity supplied◦When actual price in a market is below the equilibrium price because low price encourage buyers & discouraged sellers

◦Name a good or service that has experienced excess demand

Excess Demand

As long as there is excess demand, & quantity demanded exceeds the quantity supplied, suppliers will keep raising prices

When the price has risen enough to close the gap, suppliers will have found the highest price that the market will bear

If the price is too highAfter a short time, owners will cut prices◦Quantity demanded will rise

◦What is another name for excess supply?

Excess Supply

Impose price ceilings◦ Maximum price that can be legally charged for a good

Create price floors◦Minimum price for a good or service

Government Intervention

Placed on some goods that are considered “essential” & might become too expensive for some consumers

Price Ceilings

Rent Control◦Reduces the quantity & quality of housing

◦Landlords will have difficulty earning profits or breaking even so fewer new apartment buildings will be built & older ones might be converted into offices, stores, or condos

Market must determine which 20,000 of the 40,000 households will get an apartment◦Leads to long waiting lists, discrimination by landlords, & bribery

Many apartment buildings have become rundown

The Cost of Price Ceilings

If rents were allowed to rise, the number of apartments available would rise to 30,000

Many who could afford $900/month would find a large selection of apartments

Ending Rent Control

Landlords would also have a great incentive to properly maintain the buildings & invest in new construction

Other hand◦People would lose their homes

Imposed when government’s want sellers to receive some minimum reward for their efforts

The minimum wage◦Federal government sets a base wage & states can go higher

◦Full time minimum wage worker will earn less than what is necessary for a couple with one child

Price Floors

If the wage is set above market equilibrium wage rate, there will be a decrease in employment

If the wage is below equilibrium, it will have no effect because employers would have to pay at least the equilibrium rate to find workers

Whenever the price fell below the price floor, the government created demand by buying excess crops

Congress abolished these programs in 1996 because they conflicted with free enterprise

Price Supports in Agriculture

Today government responded to low prices by providing emergency financial aid to farmers