PUTTING SUPPLY & DEMAND TOGETHER

Chapter 7 Section 4

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EQUILIBRIUM PRICE

Price at which

Quantity Demanded

and Quantity Supplied

are equal

In the real world,

Demand and Supply

work together

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CHANGES IN DEMAND OR SUPPLY

DEMAND 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

Key Words:

Sellers/Suppliers/

Producers/Manufacturers

Determinants:

Price of Inputs

# of Firms in the Industry

Business Taxes

Technology

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SHIFTS IN EQUILIBRIUM PRICE

When Demand or Supply changes, Equilibrium

price changes

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INCREASE IN DEMAND

Increases Equilibrium

Price & Quantity

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DECREASE IN DEMAND

Decrease in

Equilibrium Price and

Quantity

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WHEN SUPPLY DECREASES

Increases Equilibrium

Price

Decreases Equilibrium

Quantity

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WHEN SUPPLY INCREASES

Equilibrium Price

Decreases

Equilibrium Quantity

Increases

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SHORTAGE

Situation in which quantity

demanded is greater than

quantity supplied

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SURPLUS

Situation in which

quantity supplied is

greater than

quantity demanded

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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!

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PRICE CONTROLS

Government gets involved

To help consumers?

Protect interest groups?

Creates:

Price Ceilings

Price Floors

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PRICE CEILING

Legal maximum price

that may be charged

for a good or services

Often creates

shortages

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PRICE FLOOR

Legal Minimum price

that may be charged

for a good or service

Often creates

surpluses

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