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Combining Supply and Demand

In this lesson, students will be able to identify factors which lead to equilibrium or disequilibrium in a market. Students will be able to identify and/or define the following terms:

EquilibriumDisequilibrium

Excess DemandExcess SupplyPrice CeilingPrice Floor

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Do you notice the point where supplyand demand intersect?

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Equilibrium

• When creating a demand curve and a supply curve, there is a point where the curves intersect. This point is the equilibrium point.

• Equilibrium occurs when the quantity demanded equals the quantity supplied.

• A market is stable at equilibrium.

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If a seller has seven donuts on the shelfat $1 per donut, and consumers only wantseven donuts at that price, then the market

is at equilibrium.

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Disequilibrium

• A market is at disequilibrium when the quantity demanded does not equal the quantity supplied.

• If quantity demanded is greater than quantity supplied, excess demand occurs.

• If quantity supplied is greater than quantity demanded, excess supply occurs.

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Low prices encourage consumers. Lowprices can create excess demand.

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Excess Demand

• Excess demand occurs when the actual price is lower than the equilibrium price.

• Low prices encourage demand.

• To fix this problem, prices must be raised.

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If every parent wants to purchase this toyfor the holidays, excess demand can occur.

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However, if no one is buying, then excess supply occurs.

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Excess Supply

• Excess supply occurs when quantity supplied is greater than quantity demanded.

• The actual price is higher than the equilibrium price.

• To fix this problem, prices must be lowered.

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The day after Valentine’s Day, consumerswill not pay high prices for Valentine’s

candy.

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Price Ceiling• A price ceiling is the maximum price that

can be legally charged for a good or service.

• The government interferes with market equilibrium when it creates a price ceiling.

• Rent control is an example of a price ceiling.

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Rent control is an example of a priceceiling.

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Price Floor

• A price floor is the minimum price that can be legally charged for a good or service.

• The government interferes with market equilibrium when it creates a price floor.

• Minimum wage is an example of a price floor.

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The minimum wage is an example ofa price floor.

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Questions for Reflection:

• When does equilibrium occur in a market?

• Why does excess demand create disequilibrium in the market?

• Define excess supply.

• Why does the government place a price ceiling on rent?

• How does rent control help some but hurt others?

• Provide an example of a price floor.