PUTTING SUPPLY & DEMAND TOGETHER
Econ Alive Chapter 6
EQUILIBRIUM PRICE
Price at which Quantity Demanded and Quantity Supplied are equal
In the real world, Demand and Supply work together
CHANGES IN DEMAND OR SUPPLYDEMAND AND SUPPLY CAN STILL CHANGE!
CHANGES IN DEMAND CHANGES IN SUPPLY
Key Words: Buyers/Consumers
Determinants: Population Income of Consumers Change in Consumer
Tastes Price of Substitutes Price of Complementary
Goods Consumer Expectations
Key Words: Sellers/Suppliers/ Producers/Manufacturers
Determinants: Price of Inputs # of Firms in the Industry Business
Taxes/Government Policy Technology Producer Expectations Natural Disaster/Major
Event
SHIFTS IN EQUILIBRIUM PRICE
When Demand or Supply changes, Equilibrium price changes
INCREASE IN DEMAND
Increases Equilibrium Price & Quantity
DECREASE IN DEMAND
Decrease in Equilibrium Price and Quantity
WHEN SUPPLY DECREASES
Increases Equilibrium Price
Decreases Equilibrium Quantity
WHEN SUPPLY INCREASES
Equilibrium Price Decreases
Equilibrium Quantity Increases
SHORTAGE
Situation in which quantity demanded is greater than quantity supplied
SURPLUS
Situation in which quantity supplied is greater than quantity demanded
USE THE FORCE! (OF THE MARKET)
We don’t like shortages or surpluses! The market wants to correct itself and
adjust the price to get back to equilibrium!
PRICE CONTROLS
Government gets involved To help consumers? Protect interest groups?
Creates: Price Ceilings Price Floors
PRICE CEILING
Legal maximum price that may be charged for a good or services
Often creates shortages
PRICE FLOOR
Legal Minimum price that may be charged for a good or service
Often creates surpluses