Essential Question:

1. SECTION 2 Determining Prices Essential Question: • Define the term market equilibrium, compare and contrast the terms surplus and shortage, and explain what happens to market equilibrium when supply or demand shifts.

2. SECTION 2 Determining Prices Market Equilibrium Market equilibrium is when the quantity supplied and the quantity demanded are equal at one specific price. The specific quantity and price? Called the Equilibrium point. M.E. is an ideal situation- not a reality- Why? Producers will continue to increase production until they have unsold items. By the time they adjust their production levels, demand has usually changed.

3. SECTION 2 Determining Prices Surplus vs. Shortage • Surplus is where the Quantity Supplied is greater than the Quantity Demanded. • Shortage is where the Quantity Demanded is greater than the Quantity Supplied

4. SECTION 2 Determining Prices Surplus vs. Shortage see page 105

5. SECTION 2 Determining Prices How the price system handles product surpluses • 1.) lowering product prices- this makes producers • 2.) decrease quantity supplied- as the quantity shrinks consumers find that they are willing to buy more which, • 3.) increases quantity demanded- and as demand increases, suppliers can increase the price.

6. SECTION 2 Determining Prices How the price system handles product shortages: • 1.) increase product prices- causing producers to- • 2.) increase quantity supplied- making sure that there is more product on the market and at the same time • 3.) Quantity Demanded will decrease due to high prices.

7. SECTION 2 Determining Prices How shifts in demand and supply affect market equilibrium: • They cause the point of market equilibrium to shift accordingly.