Principles of Economics (Condensed version)

1. Principles of Economics(Condensed version) Chapter 6: Prices (Equilibrium) El Dorado High School Spring, 2015 Mr. Ruiz

2. Terms you need to know: • Equilibrium • Disequilibrium • Excess demand • Excess supply • Price floor • Price ceiling • Minimum wage • Rent control

3. Balancing the Market • Supply and Demand work together to create A BALANCE (a PRICE that everyone can agree on) • Remember: • A Demand Schedule shows how much consumers are willing to buy at various prices. • A Supply Schedule shows how much sellers are willing to sell at various prices • Comparing these two schedules will allow us to find common ground for the two sides of the market

4. Defining Equilibrium • Equilibrium: The point at which quantity demanded and quantity supplied are equal (i.e., a point of balance between Price and Quantity) • Demand CurveEquilibriumSupply Curve

5. Disequilibrium • Disequilibrium occurs when quantity supplied is not equal to quantity demanded in a market.

6. Disequilibrium (Excess Demand) • Excess demand occurs when quantity demanded is more than the quantity supplied. • When excess demand exists, you end up with a shortage in quantities supply. Above: A drought in China leads to severe water shortage for the citizens of this agricultural community in southeast China.

7. Disequilibrium (Excess Supply) • Excess Supply occurs when quantity supplied is more than quantity demanded. • When excess supply occurs you end up with a surplus in quantities supplied. Above: This surplus of tomatoes in Spain is an example of the hundreds of thousands of tons of foods that spoil and are thrown away as a result of bad agricultural planning and lack of government subsidizing programs.

8. Government Intervention • Equilibriumis normally achieved through the market forces; however, on occasion the government is expected to intervene to control prices. • The government can impose: Price ceiling: A maximum price that can be legally charged for a good • The government will usually impose price ceilings on what are considered essential and may become to expensive for customers. Price Floor: A minimum price for a good or service • The government sets price floors when it wants some sellers to receive some minimum reward for their efforts. Ex. Minimum Wage

9. Section Two Changes in Market Equilibrium

10. Terms you need to know: • Surplus • Shortage • Search Costs

11. When a supply or demand curve shifts, a new equilibrium occurs. The market price and quantity sold move toward the new equilibrium. Brief Explanation: Market equilibrium occurs at the intersection of a demand curve and supply curve. If either the entire supply or demand curves were to shifted either to the left or to the right, it would cause a change in equilibrium price and quantity. Changes in Price

12. New technology/ lower costs can shift the supply curve to the right; however, other factors can reduce supply and shift the supply curve to the left. Examples: If the price of steel rises Automobile manufacturers will produce fewer cars at all price levels The supply curve will shift to the left When the supply curve shifts to the left, the equilibrium price and quantity sold will change as well. A Fall in Supply

13. Sudden increases/decreases in demand not particularly associated with price. Examples: Consumer taste, advertising, behavior, etc. Rapid rightward/leftward shifts could indicate the impact of outside forces on the market’s equilibrium norm. Examples: Natural disaster, War, Scarcity of particular resources, technology Problem with excess demand: Shortage: situation in which quantity demanded is greater than the quantity supplied. Search cost: The financial and opportunity cost consumers pay when searching for a good or service. Shifts in Demand