Chapter 6 Notes on Economics

Section 1 Objective: to identify the nature of prices in regards to supply/demand

I. Combining Supply and Demand

A. Balancing the Market

1. Buyers and Sellers
= Equilibrium (market clearing)
Demand and Supply

2. Defining Equilibrium
a. Equilibrium – the point at which quantity demanded and
quantity supplied are equal.
1. At equilibrium, the market for a good is stable.
3. Graphing Equilibrium (p. 126)
a. Finding the equilibrium price and quantity.
b. Supply Curve  Supply /vs/ Price
Demand Curve  Demand /vs/ Price
Two lines intersect Equilibrium
B. Disequilibrium
1. Disequilibrium – occurs when the quantity supplied is not equal to
quantity demanded.
*every price that is not at equilibrium is at disequilibrium!
2. Excess Demand – is when the quantity demanded is more than the
quantity supplied.
*low prices encourage excess demand
**as long as there is excess demand, suppliers will keep raising the
price until the market cannot handle it.
3. Excess Supply – is when the quantity supplied is more than the
quantity demanded.
a. sellers do not like to waste their resources on excess supply,
especially when the excess cannot be stored.
 C. Government Intervention
1. Price Ceiling – maximum price that can be legally charged for a good.
2. Price Floor – a minimum price for a good or service.
a. Price Ceiling – government places price ceiling on goods that
are considered “essential” and might be too expensive for
some consumers.
Ex: Rent Control in NYC.
*But, the problem with that is this can create an
increase in demand and a decrease in supply,
which will then create excess demand!!!
**Also, the “cost” of price ceilings:
-destroys incentive to improve condition.
-abuse (who is rent control meant for?)
-reduce the number of apartments.
b. Price Floors – are imposed when the government wants sellers
to receive some minimum reward for their efforts.
1. Minimum Wage – a minimum price that an employer
can pay a worker for an hour of labor.
i. If above equilibrium wage rate, there is a
decrease in employment
2. Price Support in Agriculture
i. Government would buy excess crops.

Section 2 Objective: to identify how change in the market affects equilibrium

II. Changes in Market Equilibrium
A. Changes in Price
1. market wants equilibrium price and quantity.
a. Excess demand leads to higher prices.
b. Higher prices lead to rising supply and quantity demanded to
fall.
c. Excess supply will cause price cuts and quantity demand to rise.
2. Shifts in the supply curve
a. advances in technology
b. new government taxes/subsidies
c. changes in the prices of raw materials and labor
d. a shift in the supply curve will create a new equilibrium.
3. Understanding a shift in supply
a. early 1980s – CD player cost $1000
In 1987 – CD player cost $300
Today – CD player costs ???
1. Machines today have more feature and are better than
the machines of the early 1980s.
2. Also, the price to produce and manufacture has gone
down, so this passes on the savings to us. Demand is
also not as high, either.
4. Finding a New Equilibrium
a. Surplus – situation in which quantity supplied is greater than
quantity demanded; also, known as excess supply.
1. Excess supply will lead to decreased prices, which will
lead to an increase in demand.
5. Changing Equilibrium
a. Equilibrium changes as the market conditions change
(demand/supply).
i. Sales, Rebates, Price Changes
6. Shifts in Demand
a. Problem of Excess Demand
i. “Tickle Me Elmo” and/or “Pokemon”
1. Shortage – situation in which quantity
demanded is greater than quantity supplied.
2. Search Costs – the financial and opportunity
costs consumers pay when searching for a good
or service.
Section 3 Objective: to identify the role of prices.
III. The Role of Prices
A. Prices in the Free Market  gives the consumer choices (bartering)
B. The Advantages of Prices  Price as an incentive can cause consumers to buy
more, which can cause producers to make more.
C. Prices as Signals
1. at low prices, people buy………at high prices, people tend not to buy.
2. low prices tend to slow production, whereas high prices increase production.
D. Flexibility
1. Prices are more flexible than output levels. (Short/Long Run)
2. Supply Shock – is a sudden shortage of a good (excess demand).
3. Rationing – is dividing up goods or services using criteria other than price.
*this can be expensive and time consuming
E. Price System is “Free”
1. The market can control prices without the use of government
F. Rationing and Shortages
1. Former Soviet Union /vs/ The United States
2. Communism /vs/ Wartime
G. Black Market – is a market in which goods are sold illegally
Ex: Stealing TV's and Selling them
Importing Illegal OR Prescribed Drugs and selling them.