Ch 6.1Combining Supply and Demand

Balancing the Market• EQUILIBRIUM

– The point where _______________________come together at the same number is called equilibrium. It is the point of balance between_______________. At this point, the market for a good is stable.

• DISEQUILIBRIUM– If the market price or quantity supplied is anywhere but at the

equilibrium, the market is in a state that economists call _______________. This occurs when quantity supplied is ___________________to quantity demanded. Disequilibrium either produces excess demand or excess supply.

demand and supply

price and quantity

disequilibriumnot equal

Excess Demand

• The problem of excess demand occurs when quantity demanded is _____ than quantity ________. When the actual price in the market is ________ the equilibrium price you have excess demand, because a low price encourages buyers and________________. As long as there is excess demand and the quantity demanded exceeds the quantity supplied, suppliers will keep __________to meet equilibrium.

more

supplied

below

discourages sellers

raising the price

Excess Supply

• If the price of a good is_______, then the market will face a problem of__________. Excess supply occurs when quantity supplied exceeds quantity demanded. Whenever the market is in disequilibrium and prices are flexible, market forces will push the market toward the___________. Sellers do not like to waste their resources on excess supply, particularly when the goods cannot be stored for long.

too high

excess supply

equilibrium

Government Interventions

• Price Ceilings– A pc is a _____________set by law that

sellers can charge for a good or service. These are placed on goods that are considered “essential”. Ex. ______

• Price Floors– A pf is a______________, set by the

government, that must be paid for a good or service. Ex. _________________

maximum price

Rent,

minimum price

Minimum wage, milk

Ch 6.2

Changes in Market Equilibrium

Changes in Price

• Advances in___________, new government taxes and subsidies, and changes in the prices of ____________and labor used to produce the good

• Shift in Supply : see figure 6.5 (p. 134)– Give an example of a technology that was expensive

& hard to find – but is now cheaper & easy to get…this is a shift in supply

– Surplus: when quantity supplied exceeds quantity demanded

• Give an example of something that everyone wanted 5 years ago that no one wants today…

technology

raw materials

Fall in Supply

• Shifts to the______

• With this shift equilibrium will also change. With the shift to the left, suppliers ___________________and the quantity demanded falls.

left

raise their prices

Shifts in Demand

• The Christmas FRENZY!! Fads & consumer taste & advertising…

• Shortage: quantity demanded is _________ than quantity supplied (excess demand)

• Search cost: the financial and ________________consumer pay when searching for a good or service…ex. Expedia v. travel agent

greater

opportunity cost

Fall in Demand

• Demand shifts _____

• Suppliers respond by ____________ on their inventory.

left

cutting prices

Michael Dell

• As a teen, Dell saw a future in personal computers. During his freshman year at the University of Texas, he sold PC’s from his dorm room. Business was so good that he quit school the next year and with 1K started a company. Fifteen years later, Dell Computer corporation was a 19.9 BILLION dollar business with more than $18 million a day in sales on its internet site. Dell’s vision was to sell directly to the consumer and allow customers to customize their needs. He could also sell for less. He also did not have to maintain warehouses of unsold goods since each computer was custom made. In 1996 Dell became on e of the first manufacturers to offer products via the Internet.

You Decide

• Explain how the equilibrium price and quantity sold of eggs will change in the following cases & graph each one:– An outbreak of food poisoning is traced to

eggs– Scientists breed a new chicken that lays twice

as many eggs each week– A popular talk show host convinces her

viewers to eat an egg a day

WARM-UP

Write 5 cause effect statements which include supply/demand.

Ex: Hot weather leads to greater demand for air conditioners with leads to higher prices which leads to a greater supply.

Ch 6.3

The Role of Prices

Prices in the Free Market

• Prices can move markets toward equilibrium and solve problems of _______________ and excess demandexcess supply

Advantages of Prices• Price as an Incentive

– Price signals if an item is in short supply or readily available

• Prices as Signals– Red light: low price – low demand; a good is being

overproduced, so producers should make another product.

– Green light: high price – high demand so they should produce more. New suppliers will join the market.

• Flexibility– Supply shock:______________

• creates excess demand (gas, wheat)– Raising prices is the quickest way to decrease demand

– Rationing: dividing up goods/services using criteria other than price (ex. WWII)

• Pricing is Free – based on consumers– Unlike central planning, a distribution system based

on prices costs nothing to administer. Free market pricing distributes goods through millions of decisions made daily by consumers and suppliers.

sudden shortage

Wide Choice of Goods

• Rationing

• Shortages

• The Black market: When people conduct business without regard for government controls on price or quantity

Price and the Profit Incentive

• Efficient resource allocation occurs naturally in a market system as long as the system works reasonably well. Landowners tend to use their scarce property in the most profitable manner. Workers usually move toward high-paying jobs, and capital will be invested in the firms that pay the highest returns.

The Wealth of Nations

• Businesses prosper by finding out what people_____, then providing it. want

Spillover costs

• ____________that include costs of production such as air and water pollution

• This spills over onto people who have ______________ over how much of a good is produced

• Producers don’t have to pay spillover costs so they will keep producing while these extra costs will be paid by _______________.

Externalities

no control

consumers

Real Life Case Study

• Get into 5 groups• I will assign one of the following case studies to

you– p. 97 What is an Entrepreneur– P. 121 Professional Baseball– P. 145 Beanie Babies– P. 205 Business and Ethics– P. 235 US Improve Working Conditions

Create a chart explaining the study & answering the questions

• Get ready to present!