Copyright © Pearson Education, Inc.Slide 1 Chapter 6, Section 1 Ch 6: What is the right price?...

Copyright © Pearson Education, Inc. Slide 1Chapter 6, Section 1

Ch 6: What is the right price?Ch 6: What is the right price?

• Section 1: What factors affect price?


IntroductionIntroduction

• What factors affect price?

– Law of demand. (households)

– Law of supply (firms)

– Government through price controls.

• We will study rent control and minimum wage


•Equilibrium is where things are balanced: Supply = Demand at P*

Market Equilibrium: Where Supply Meets Demand (p135)Market Equilibrium: Where Supply Meets Demand (p135)


Market Equilibrium: Where Supply Meets Demand (p135)Market Equilibrium: Where Supply Meets Demand (p135)

How many slices are sold at equilibrium?

What is the price?


• If the market price or quantity is anywhere but at equilibrium, the market is said to be at disequilibrium.

• Disequilibrium can produce two possible outcomes:

– Shortage—A shortage causes prices to rise as the demand for a good is greater than the supply of that good.

– Surplus—A surplus causes a drop in prices as the supply for a good is greater than the demand for that good.

Market Disequilibrium:Shortage and Surplus (p.136)Market Disequilibrium:Shortage and Surplus (p.136)


• What does a shortage mean?

• What quantity is the shortage when pizza is sold at $2.00 per slice?

• What would a pizzeria do in response to a shortage?

• What is the effect on demand?

Market Disequilibrium:Shortage (p.136)Market Disequilibrium:Shortage (p.136)


Market Disequilibrium:Surplus (p.136)Market Disequilibrium:Surplus (p.136)• What does a surplus mean?

• What quantity is the surplus when pizza is sold at $4.00 per slice?

• What would a pizzeria do in response to a surplus?

• What is the effect on demand?


Market Disequilibrium: Government InterventionMarket Disequilibrium: Government Intervention

• Sometimes the government intervenes and sets market prices.

• Two types of price controls:

– Price Ceilings / Rent Control

– Price Floors / Minimum Wage


The Effects of Rent Control (p.138)The Effects of Rent Control (p.138)

• What is the equilibrium price and output of apartments?

• How much is rent control? Price ceiling or floor? What change from equilibrium price?

• Is there a surplus or shortage of apartments? What evidence?


The Effects of Minimum Wage (p.139)The Effects of Minimum Wage (p.139)• What is the equilibrium wage

and output of workers?

• What is the minimum wage?

• Is it a price ceiling or floor?

• What is the change from equilibrium price?

• Is there a surplus or shortage of workers? What evidence?


Key TermsKey Terms

• market: exchange between firms/sellers and households/buyers

• market equilibrium: the point at which the demand for a product or service is equal to the supply of that product or service

• disequilibrium: any price or quantity not at equilibrium

• shortage: when quantity demanded is more than quantity supplied

• surplus: when quantity supplied is more than quantity demanded


Key Terms, cont.Key Terms, cont.

• price ceiling: a maximum price that can legally be charged for a good or service

• rent control: a price ceiling placed on apartment rent

• price floor: a minimum price for a good or service

• minimum wage: a minimum price that an employer can pay a worker for one hour of labor

Copyright © Pearson Education, Inc.Slide 1 Chapter 6, Section 1 Ch 6: What is the right price?...

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