Supply Demand Working Together 21 4 Demand Curve

Supply & Demand Working Together 21 -4 Demand Curve Supply Curve

Supply and Demand at Work n What is a market? n n Any place or mechanism where g/s are exchanged between buyers & sellers The forces of supply and demand work together in markets to set prices.

The Price Adjustment Process n Why are supply & demand curves combined? n n To see how they work together to set prices Remember, in a market economy like ours, prices rise & fall according to what the consumer is willing to pay. This is VERY different in a command economy where the GOVT. determines ALL prices! What color is the demand curve? blue What color is the supply curve? red n When you see these curves on the test, they WILL NOT be in color!

Surplus: Too much of a product n At $40, suppliers will put 225 video games on the shelf, but consumers will only buy 150 at that price. n n n What is a surplus? n n n Anytime you have extra products that didn’t get sold When the # of units supplied (by the producer) is higher than the quantity demanded (by the consumer) What does a surplus signal? n n How many are left over that won’t get sold? 75 (225 -150=75) The price is too high As a result, what will the seller do? n Lower the price

Shortage: selling out of a product n At $20, suppliers will put 105 video games on the shelf, but consumers want to buy 230 at that price (b/c that’s a good price!). n n n What is a shortage? n n When the # of units demanded (by the consumer) is higher than the quantity supplied (by the producer) What does a shortage signal? n n How many more video games are needed to meet the consumers’ demands? 125 (230 -105= 125) The price is too low. As a result, what will the seller do? n n Raise the price This usually doesn’t happen immediately, though. Customers would be very upset to have the pay a higher price for the SAME product that ran out.

Market Forces n What is the equilibrium price? n n n The perfect PRICE where there is no surplus & no shortage! In other words, supply = demand Using the graph on p. 589, the equilibrium price is $30. At this price, there is neither a shortage or a surplus (because consumers will demand the same number of video games that producers are willing to supply). Therefore the two quantities are EQUAL equilibrium price! It’s where the two curves intersect!

Price Controls Even though we don’t live in a command economy where the govt. sets prices, the govt. does interfere with prices ONLY to protect the consumer. n Why might the government set the price for a product? n n Some prices are unfair, so the govt. will step in to make sure consumers aren’t being taken advantage of. What is a price ceiling? n n n When the govt. sets a maximum price for a g/s price “ceiling” = maximum (get it? ? ) maximum Example: n n Price Ceiling Rent for an apartment (the govt. might say that a one bedroom apt. can not be rented for more than $800…again, this protects the consumer! ) What is a price floor? n n n When the govt. sets a minimum price for a g/s price “floor” = minimum (get it? ? ) Example: n Price Floor Wages that a worker gets paid (the govt. creates a “minimum wage” law that says that each worker must be paid at least that amount…this protects the worker! )

Now, go back to the combined supply curve & demand curve that we drew together yesterday.

You learned 3 vocab. words from this worksheet that you need to add to YOUR graph. All of these will be shown on the curves: Equilibrium Price n Surplus n Shortage n

Equilibrium Price The price at which quantity demanded = quantity supplied Demand Curve Supply Curve Price

Surplus: goods left over Demand Curve Notice: It’s above the EQP. Surplus Supply Curve

Shortage: goods sold out! Demand Curve Supply Curve Shortage Notice: It’s below the EQP

n Now, let’s see how all of these can be seen on the schedules: Equilibrium Price n Surplus n Shortage n

Looking at a schedule. Price $50 Q Q demanded supplied 100 275 Will have leftovers $40 150 Notice: It’s located above the EQP. Surplus 225 Will have leftovers Equilibrium Price $30 180 b/c $20 230 105 quantities are equal Won’t have enough $10 300 55 Won’t have enough $5 400 30 Won’t have enough Shortage Notice: It’s located below the EQP.

Now, can you do it by yourself? n Can you point to n n n the demand curve? the supply curve? The equilibrium price? the surplus? the shortage? Do you need to hit the backspace button to review first?

A. Point to the demand curve B. Point to the supply curve. C. Point to the equilibrium price. D. Point to the surplus. E. Point to the shortage. Demand Curve Supply Curve surplus Eq. P shortage

Try this: Call Ms. Meadows over when you think you have all 3 answers! a. What is the equilibrium price? b. Where is the surplus? c. Where is the shortage? Price Q Q demanded supplied $50 100 275 $40 150 $30 180 130 $20 230 90 $10 300 50 $5 400 35

A. Point to the demand curve this: B. Point to the. And supply curve. C. Point to the equilibrium price. D. Point to the surplus. E. Point to the shortage.

Study!