Topic 6.1 combining supply and demand

6.1: Combining Supply and Demand
Objectives
1. Explain how supply and demand create balance in the marketplace.
2. Compare a market in equilibrium with a market in disequilibrium.
3. Identify how the government sometimes intervenes in markets to control prices.
4. Analyze the effects of price ceilings and price floors.

Buyers always want to pay the lowest possible price, while sellers hope to sell at the highest possible price. With buyers and sellers at odds, how can a market system satisfy both groups? In a free market system, supply and demand work together. The result is a price that both sides can agree on.

Price of a slice of pizza ($) Quantity Demanded Quantity Supplied Result
.50 300 100 Shortage from
1.00 250 150 excess demand
1.50 200 200
Equilibrium

2.00 150 250 Surplus from excess
2.50 100 300 supply
3.00 50 350












Equilibrium – The point at which quantity demanded and quantity supplied are equal.

What is the equilibrium price in the example above?

Disequilibrium – describes any price or quantity not at equilibrium; when quantity supplied is not equal to quantity demanded.


Excess Demand (Shortage )– When quantity demanded is more than quantity supplied.

Excess Supply (Surplus) – When quantity supplied is more than quantity demanded.

Excess Demand Excess Supply













Suppliers will raise or lower their prices to meet consumers’ wishes. And in the process, restore the market to equilibrium.

Government Intervention

The government can purposefully make a market in disequilibrium in two ways: price floors and price ceilings.

Price Ceiling – A maximum price that can be legally charged for a good or service.

EX: Rent control













Pros/Cons




Price Floor – a minimum price for a good or service.

EX: Minimum wage












Pros/Cons