Demand Supply and Prices Chapter 6 Sections 1

Demand, Supply, and Prices Chapter 6 Sections 1 & 2

Seeking Equilibrium: Demand & Supply � Market Equilibrium ◦ At a certain price, quantity demanded and quantity supplied are equal � Equilibrium Price ◦ Price at which quantity demanded and quantity supplied are equal

Reaching Equilibrium Price � Law of Demand Supply interact � Vertical axis shows various prices � Horizontal axis shows quantity of product � Intersect at Equilibrium � Surplus-more quantity supplied than demanded ◦ Shown above or below equilibrium point ◦ Measured by horizontal difference between 2 curves ◦ Prices tend to fall, producers cut back production � Shortage-more quantity demanded than supplied ◦ Prices rise, producers increase quantity supplied

Equilibrium Price in Real Life � Disequilibrium ◦ Imbalance between quantity demanded and quantity supplied � Decrease in demand shifts move to the left ◦ Demand curve intersects supply curve at lower price ◦ Equilibrium price falls, fewer units sold even if price is lower � Increase in demand shifts move to the right ◦ Equilibrium prices rise, more units sold even if price is higher

Prices as Signals and Incentives � Competitive Pricing- Selling products at lower prices than others ◦ Lures customer away from rival competitors ◦ Maintains overall profits by selling more units

Price System Characteristics � Neutral ◦ Interaction of consumers, producers set equilibrium prices � Market Drive ◦ Market forces, not central planners determines prices � Flexible ◦ Surpluses, shortages lead producers to change prices � Efficient ◦ Prices adjust until maximum number of products sold

Prices Motivate Producers & Consumers � Prices motivate consumers and producers to act in different ways � Incentive: Encourages people to act in a certain way � In price system, incentives move producers and consumers ◦ Both act in own best interest

Vocabulary Market Equilibrium At a certain price, quantity demanded and quantity supplied are equal Equilibrium Price at which quantity demanded and quantity supplied are equal Surplus more quantity supplied than demanded Shortage more quantity demanded than supplied Disequilibrium Imbalance between quantity demanded and quantity supplied Competitive Pricing Selling products at lower prices than others Neutral Interaction of consumers, producers set equilibrium prices Market Drive Market forces, not central planners determines prices Flexible Surpluses, shortages lead producers to change prices Efficient Prices adjust until maximum number of products sold Incentive Encourages people to act in a certain way