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