Combining Supply and Demand

1. 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: Equilibrium Disequilibrium Excess Demand Excess Supply Price Ceiling Price Floor E. Napp

2. Do you notice the point where supply and demand intersect? E. Napp

3. 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. E. Napp

4. If a seller has seven donuts on the shelf at $1 per donut, and consumers only want seven donuts at that price, then the market is at equilibrium. E. Napp

5. 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. E. Napp

6. Low prices encourage consumers. Low prices can create excess demand. E. Napp

7. 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. E. Napp

8. If every parent wants to purchase this toy for the holidays, excess demand can occur. E. Napp

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

10. 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. E. Napp

11. The day after Valentine’s Day, consumers will not pay high prices for Valentine’s candy. E. Napp

12. 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. E. Napp

13. Rent control is an example of a price ceiling. E. Napp

14. 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. E. Napp

15. The minimum wage is an example of a price floor. E. Napp

16. 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. E. Napp