Chapter 6 notes – all sections

Price Adjustment Process

• Market Equilibrium - a situation in which prices are relatively stable, and Qs = Qd (S and D cross)

• Surplus – Qs > Qd; price tends to go down as a result

• Shortage – Qd > Qs; results in the price and quantity supplied going up usually

Figure 8 The Equilibrium of Supply and Demand

Price ofIce-Cream

Cone

0 1 2 3 4 5 6 7 8 9 10 11 12Quantity of Ice-Cream Cones

13

Equilibriumquantity

Equilibrium price Equilibrium

Supply

Demand

$2.00

Figure 9 Markets Not in Equilibrium

Price ofIce-Cream

Cone

0

Supply

Demand

(a) Excess Supply

Quantitydemanded

Quantitysupplied

Surplus

Quantity ofIce-Cream

Cones

4

$2.50

10

2.00

7

Figure 9 Markets Not in Equilibrium

Price ofIce-Cream

Cone

0 Quantity ofIce-Cream

Cones

Supply

Demand

(b) Excess Demand

Quantitysupplied

Quantitydemanded

1.50

10

$2.00

74

Shortage

Price Ceilings

• Maximum legal price that can be charged for a product

• Example: rent control• BELOW EQUILIBRIUM• Causes a shortage

Price Floors

• Lowest legal price that can be paid for something

• Example – minimum wage• ABOVE EQUILIBRIUM• Causes a surplus

Shifting Curves with S and D

• When a S or D curve shifts it will change the Equilibrium Price and Quantity

Figure 10 How an Increase in Demand Affects the Equilibrium

Price ofIce-Cream

Cone

0 Quantity of Ice-Cream Cones

Supply

Initialequilibrium

D

D

3. . . . and a higherquantity sold.

2. . . . resultingin a higherprice . . .

1. Hot weather increasesthe demand for ice cream . . .

2.00

7

New equilibrium$2.50

10

Figure 11 How a Decrease in Supply Affects the Equilibrium

Price ofIce-Cream

Cone

0 Quantity of Ice-Cream Cones

Demand

Newequilibrium

Initial equilibrium

S1

S2

2. . . . resultingin a higherprice of icecream . . .

1. An increase in theprice of sugar reducesthe supply of ice cream. . .

3. . . . and a lowerquantity sold.

2.00

7

$2.50

4