CHAPTER 6: DEMAND, SUPPLY, AND PRICES

Key Concept: Equilibrium

Market Equilibrium: Occurs when the quantity demanded and the quantity supplied at a particular price are equal.

Equilibrium Price: is the price at which the quantity demanded and the quantity supplied are equal.In this example,

market equilibrium is when 600 binders are supplied and the equilibrium price is $6.

In this example, market equilibrium is at 600 slices of pizza and the equilibirum price is $1.50 per slice.

Market Equilibrium is at the point where the demand and supply curves intersect.

Everything in the space under the two curves and equilibrium point is a shortage and likewise, everything above is surplus.

At various times a product may experience a shortage or surplus depending on where price and quantity are meeting in relation to the equilibrium.

Key Concept: Disequilbrium

Disequilibrium: Occurs when quantity demanded and quantity supplied are not in balance. Shifts in both the supply and demand curve

cause the equilibrium to shift as well. As a result for some time the market may be in disequilibrium.

If demand decreases or supply increases then equilibrium price falls and if demand increases or supply decreases then equilibrium prices rises.

Prices as Signals and Incentives Competitive Pricing: occurs when

producers sell products at lower prices to lure customers away from rival producers, while making a profit.

Characteristics of a Price System 1. Neutral: Both producer and the consumer

make choices that determine the equilibrium price.

2. Market Driven: Market forces, not government policy, determine prices. In effect, the system runs itself.

3. Flexible: When market conditions change, so do prices.

4. Efficient: Resources are allocated efficiently since prices adjust until the maximum number of goods and services are sold.

Intervention in the Price System Price Ceiling: Is the legal maximum

price that sellers may charge for a product.

Intervention in the Price System Price Floor: is a legal minimum price

that buyers must pay for a product. Minimum wage is an example of a price

floor. It is the minimum legal amount an employer may pay their employees.

Key Concepts: Rationing and the Black Market

Rationing: Is a government system of allocating goods and services using criteria other than price.

Black Market: Involves illegal buying or selling in violation of price controls or rationing.