Copyright © Pearson Education, Inc.Slide 1 Chapter 6, Section 1 Essential Question Ch 6: What is...

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

Essential QuestionEssential Question

Ch 6: What is the right price?

• Section 1: What factors affect price?


ObjectivesObjectives

1. Explain how supply and demand create equilibrium in the marketplace.

2. Describe what happens to price and quantity when in disequilibrium.

3. Identify two ways that the government intervenes in markets to control prices.

4. Analyze the impact of price ceilings and price floors on a free market.


IntroductionIntroduction

• What factors affect price?

– Law of demand. (households)

– Law of supply (firms)

– They are also affected by actions of the government.

• Often times the government will intervene to set a minimum or maximum price for a good or service.

• We will study rent control and minimum wage


Market Equilibrium: Where Supply Meets DemandMarket Equilibrium: Where Supply Meets Demand• Assumptions

– Consumers maximize utility• Law of Demand: Demand goes up as price goes down

– Firms maximize profit• Law of Supply: Supply goes up as price goes up

• Notation• S1 = Original Market Supply Curve

• D1 = Original Market Demand Curve

• P* = Equilibrium Price

• Q* = Equilibrium Output

• P1 = Price if different from equilibrium price

• Q1 = Quantity if different from equilibrium quantity


Market Equilibrium: Where Supply Meets DemandMarket Equilibrium: Where Supply Meets Demand

• We are focusing on the the market are many buyers and seller

• Equilibrium is where things are balanced: S = D

• In order to find the equilibrium price and quantity, you can use supply and demand schedules.

• When a market is at equilibrium, both buyers and sellers benefit. The market is stable.


Market Equilibrium: Where Supply Meets DemandMarket Equilibrium: Where Supply Meets Demand


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?How many firms are in this market?What is profit?


• Checkpoint: What might cause a pizzeria owner to throw out many pizza slices at the end of the day?

– 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.

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


Disequilibrium:Shortage and Surplus (p.136)Disequilibrium:Shortage and Surplus (p.136)• Shortage and surplus are both examples of

disequilibrium– How much is the shortage when pizza is sold at $2.00 per slice?– What will Gigio’s do in response to the shortage (line out the

door)?– Based on the second graph, how might the pizzeria solve the

problem of excess supply?


The Pull Back to EquilibriumThe Pull Back to Equilibrium

• When a market is in disequilibrium, there are either shortages or surpluses

• The market will eventually move back toward equilibrium.– Shortages cause a firm to raise its prices.

• Higher prices cause the quantity supplied to rise and the quantity demanded to fall until the two values are equal again.

– Surpluses cause a firm to drop its prices. • Lower prices cause the quantity supplied to fall and the

quantity demanded to rise until equilibrium is restored.


Government Intervention:Intentional Disequilibrium Government Intervention:Intentional Disequilibrium • Markets drift toward equilibrium on their own

• Sometimes the government intervenes and sets market prices.

• Two ways the government controls prices:

– Price Ceilings / Rent Control

– Price Floors / Minimum Wage


Price Ceilings: Rent Control Price Ceilings: Rent Control

• In price ceilings, the government caps or limits the price that can be charged for a good/service

• Rent Control– Sets a price ceiling on apartment rent– Prevents inflation during housing crises– Helps the poor cut their housing costs– Can lead to poorly managed buildings because

landlords cannot afford the upkeep.– Can lead to shortage of housing


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


Price Floors: Minimum WagePrice Floors: Minimum Wage

• In price floors, the government sets a floor or a minimum price that must be charged for a good/service (including the factors of production)

• Minimum Wage– Sets a price floor on the price for labor (wages)– Affects both supply and demand for labor– Helps people in low-income jobs earn a higher

wage– Can lead to shortage of jobs available– Can lead employers to substitute capital for labor


The Effects of Minimum Wage (p.139)The Effects of Minimum Wage (p.139)• At what wage is the labor

market at equilibrium?

• How many workers are hired at equilibrium?

• What is the minimum wage?

• Is it a price ceiling or floor?

• How much higher than equilibrium price do workers get paid?

• How many less workers are demanded at minimum wage level?


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 Essential Question Ch 6: What is...

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