Demand Supply and Price

1. C H A P T E R 6
Demand, Supply, & Prices

2. The Interaction of Demand and Supply
 Market equilibrium: Quantity demanded is equal to
quantity supplied
 Equilibrium price: is the price where the market is at
equilibrium.
E
D1
S1

3. Reaching the Equilibrium Price
 Surplus: results when quantity supplied is greater
than quantity demanded.
 This will be found above the equilibrium point on a graph
 Shortage: when quantity demand exceeds quantity
supplied.
 This will be found below the equilibrium point on a graph.

4. Reaching the Equilibrium Price
1
2
3
4
5
6
7
1 2 3 4 5 6 7 8
Price
Quantity
Surplus
Shortage
D1
S1Amount demanded
Amount supplied

5. Holiday Toys
 Think of the hot Holiday toy around Christmas time,
there is often a shortage of the toy during the holiday
shopping spree. After the holiday there may be a
surplus.

6. Change in Demand and Equilibrium Price
 Disequilibrium: occurs when quantity demanded
and quantity supplied are not balanced.
D1
D2
Quantity
Price D3A decrease in demand
results in a drop in
equilibrium price
An increase in demand
results in an increase in
equilibrium price
E

7. Change in Supply and Equilibrium Price
Quantity
price
S1
S2
S3
e
A decrease in Supply results
in an increase in Price
An increase in supply results
in a decrease in price

8. S E C T I O N 2
Price as Signals and incentives

9. How the Price System Works
 Competitive pricing: occurs when producers sell
products at lower prices to lure customers away from
rival producers, while still making a profit.

10. How the Price System Works
 It’s neutral: the free interaction between producers
and consumers determines equilibrium price.
 It’s market driven: price system runs it’s self, not
a government.
 It is flexible: when conditions change, prices are
able to change quickly in response
 It’s efficient: prices will adjust until maximum
number of goods and services are sold.

11. Prices Motivate Producers and Consumers
 Incentive: is a way to encourage people to take a
certain action.
 What incentives affect producers?
 What incentives affect consumers?

12. S E C T I O N 3
Intervention in the Price
System

13. Imposing Price ceilings
 Price ceiling: the legal maximum price that sellers
may charge for a product.
 Price ceilings result in shortages. They are set below the
equilibrium price.
 Rent control
 Football tickets
Price Ceiling
e

14. Price Ceilings
 Why do you think colleges don’t raise prices on
football tickets?
 What about concert tickets that sell out?

15. Setting Price Floor
 Price Floor: the legal minimum price that buyers
must pay for a product.
 Are set above the equilibrium price. They create a surplus.
 Minimum wage
Price floor
e

16. Minimum wage
 What do you think would happen if we increased
minimum wage?
 What businesses might be hurt by this most?
 http://www.stltoday.com/business/columns/david-nicklaus/nicklaus-seattle-experiment-should-prove-the-perils-of-a-
higher/article_77c530f1-c87e-5b81-b414-7805913a9c3d.html

17. Rationing Resources and Products
 Rationing often takes place during war time, it is
done on a first come first serve basis.
 Black markets are a product of the rationing system
where rationed items go to the highest bidder.

18. Demand Factors Supply factors
 Market size
 Income
 Consumer expectations
 Substitute goods
 Complementary goods
 consumer taste
 Forces of nature
 # of producers
 Producer expectations
 Labor productivity
 Government action
 Input cost
 Technology
Factors that affect Supply and Demand

19. Calculating Surplus or Shortage
 Consumer surplus= buyers max-price
 Producer surplus= price –sellers max