Objectives Explain how supply and demand create equilibrium

Objectives Explain how supply and demand create equilibrium in the marketplace. 2. Describe what happens to prices when equilibrium is disturbed. 1. Chapter 6, Section 1

What is Equilibrium? Equilibrium the point at which the demand for a good or service is equal to the supply • When a market reaches equilibrium, it is stable. Chapter 6, Section 1

A “Moving Target” n Equilibrium for most products is in constant motion. n Think of equilibrium as a “moving target” that changes as market conditions change. n As supply or demand increases or decreases, a new equilibrium is created for that product. Chapter 6, Section 1

Disequilibrium n If the market price or quantity supplied is anywhere but at equilibrium, the market is said to be at disequilibrium. n Disequilibrium can produce two possible outcomes: – Shortage— Demand for a good is greater than supply. Prices rise. – Surplus— Supply for a good is greater than demand. Prices drop. Chapter 6, Section 1

Shortage: If D>S, then P Surplus: If S>D, then P Chapter 6, Section 1 ↑ ↓

How Supply and Demand Affect Equilibrium n Changes in supply and demand cause prices to go up and down, which disrupts the equilibrium for a particular good or service. n In a free market, price and quantity will tend to move toward equilibrium whenever they find themselves in disequilibrium. Chapter 6, Section 1

Shortages Surpluses Shortages cause a firm to raise its prices. Surpluses cause a firm to drop its prices. Higher prices cause the quantity supplied to rise. Lower prices cause the quantity supplied to fall. High prices cause the quantity demanded to fall. Low prices cause the quantity demanded to rise. EQUILIBRIUM ! Chapter 6, Section 1

Key Terms n equilibrium: the point at which the demand for a product or service is equal to the supply of that product or service n disequilibrium: any price or quantity not at equilibrium n shortage: when quantity demanded is more than quantity supplied n surplus: when quantity supplied is more than quantity demanded Chapter 6, Section 1

Bell Ringer n. Who do you think benefits the most from an increase in the minimum wage? n. Who benefits the least from (or is hurt by) an increase in the minimum wage? Chapter 6, Section 1

Objectives Identify two ways that the government intervenes in markets to control prices. 2. Analyze the debate surrounding the federal minimum wage. 1. Chapter 6, Section 1

Introduction n While markets tend toward equilibrium on their own, sometimes the government intervenes and sets market prices. n The government can control prices in two ways: § Price ceilings § Price floors Chapter 6, Section 1

Price Ceiling n Price ceilings- the maximum price that can legally be charged for a good or service n EXAMPLE: Tortillas in Mexico § “Tortilla Price Stabilization Pact” § In 2007, President Calderon created an agreement between the Mexican Federal Govt. and several tortilla companies in Mexico to set a price ceiling for corn tortillas at 8. 50 pesos/kg ($0. 21/lb) Chapter 6, Section 1

Price Floors n. A price floor is a minimum price set by the government. n The minimum wage is an example of a price floor. n Minimum wage affects the demand the supply of workers. Chapter 6, Section 1

Minimum Wage n What is the current federal minimum wage? $7. 25 n What is the minimum wage in Arizona? $10. 50 n What do you think the minimum wage should be? Chapter 6, Section 1

Minimum Wage Argument n How does a minimum wage increase hurt businesses? – Increased labor costs – Increased prices (less competitive) n What are some ways businesses can respond to a minimum wage increase? – Reduce workers – Less training – Less health care benefits – Raise prices – Live with fewer profits… yeah, right! Chapter 6, Section 1

Minimum Wage Argument n How does a minimum wage increase help businesses? – More competitive workforce – More productive workers – More skilled/educated workers – Increased wages = increased spending Chapter 6, Section 1

Minimum Wage Discussion n What is the purpose of a minimum wage? Should there even be a minimum wage? n Assume the minimum wage raises prices but also raises productivity. Is this an acceptable trade-off? n Should the federal minimum wage be increased? Why/why not? Chapter 6, Section 1

Bell Ringer n List three ways that raising the minimum wage hurts the economy. n List three ways that raising the minimum wage helps the economy. Chapter 6, Section 1

Objectives Identify the many roles that prices play in a free market. 2. Describe the role of the “black market” in the global economy. 1. Chapter 6, Section 1

Introduction n What roles do prices play in a free market economy? – In a free market economy, prices are used to distribute goods and resources throughout the economy. – Prices play other roles, including: § Serving as a language for buyers and sellers § Serving as an incentive for producers § Serving as a signal of economic conditions Chapter 6, Section 1

The Role of Prices n Prices provide a standard of measure of value throughout the world. n Prices act as a signal that tells producers and consumers how to adjust. Chapter 6, Section 1

The Role of Prices n Prices tell buyers and sellers whether goods are in short supply or readily available. Chapter 6, Section 1 BP gas station, immediately following Hurricane Katrina

The Role of Prices n The price system is flexible and free, and it allows for a wide diversity of goods and services. Chapter 6, Section 1

The Black Market n Since the government cannot track all of the goods passing through the economy, people sometimes conduct business on the black market in order to bypass rationing and legal restrictions. n Choco Pies in North Korea: https: //www. youtube. com/watc h? v=Ufx. OTEq. VVa. Q Chapter 6, Section 1

Equilibrium Quiz 1. When demand is greater than supply for a good, it’s price will always go _______. 2. The above question is an example of a shortage/surplus (choose one). 3. Any time the quantity supplied for a good does not equal the quantity demanded, the market is said to be in _______. Chapter 6, Section 1

Equilibrium Quiz 4. What happens to the market for marijuana when the DEA makes a huge bust on the border? (Demand/Supply up/down? Price up/down? ) 5. What happens to the market for gasoline when the U. S. enters into a recession? (Demand/Supply up/down? Price up/down? ) 6. What happens to the market for steak if consumers stop purchasing products made of leather? (Demand/Supply up/down? Price up/down? ) Chapter 6, Section 1