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Combining Supply and Demand

The document discusses the laws of supply and demand and how they interact to determine market equilibrium. It explains that the equilibrium point occurs where the supply and demand curves intersect, and quantity supplied equals quantity demanded. It then discusses what happens in cases of disequilibrium when the price is above or below the equilibrium point, leading to excess supply or excess demand. The document concludes by discussing how government interventions like price ceilings and price floors can disrupt market equilibrium.

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Tammie Dang
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16 views15 pages

Combining Supply and Demand

The document discusses the laws of supply and demand and how they interact to determine market equilibrium. It explains that the equilibrium point occurs where the supply and demand curves intersect, and quantity supplied equals quantity demanded. It then discusses what happens in cases of disequilibrium when the price is above or below the equilibrium point, leading to excess supply or excess demand. The document concludes by discussing how government interventions like price ceilings and price floors can disrupt market equilibrium.

Uploaded by

Tammie Dang
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Combining Supply and

Demand
6.1
Two Powerful Laws
 Law of Demand: As Price goes
up people want less
 Explains wide variety: why

downtown buildings are taller,


why people will sit in the
upper deck of a stadium
Two Powerful Laws
 Law of Supply: The higher the price
of a good, the greater the quantity
suppliers will produce
 Explains why parking places at the

beach are more expensive in the


summer months, why people are
paid overtime at a premium wage
Equilibrium
 The point where demand and
supply curves intersect
 This is where both producers and
consumers are satisfied
 Quantity demanded equals quantity
supplied
 Only happens at one point
Disequilibrium
 If the price is anywhere but
equilibrium, quantity supplied
does not equal quantity
demanded
 Leads to excess supply or excess
demand
Excess Demand
 When the quantity demanded is
greater than the quantity supplied
 Price is below market equilibrium
 Low price encourages buyers but
not sellers
 When there is excess demand
suppliers will raise their price
Excess Supplied
 When quantity supplied exceeds
quantity demanded
 High price encourages sellers but
not consumers
 Price is above equilibrium
 Suppliers will lower prices to sell
excess supply
Effects of Excess
 When the market is in disequilibrium and
prices are able to change, the market
will naturally correct itself
 Suppliers may get tired of throwing

away extra product if there is excess


supply
 Suppliers may raises prices to

increase profit when there is excess


demand
Government Intervention
Price Ceilings
 A maximum price that can be charged for
a good
 Set by law on goods considered essential
and might become to expensive
 Rent control is the most famous

example
 Symbolized on a curve by drawing a
straight line across at the price ceiling
Price Ceilings
 Reduce quantity supplied and the
price charged
 Means lower total revenue

 Lower revenue means no

incentives to improve the product


 Excess demand is created
Consequences of a Price
Ceiling
Excess demand means some
non-price factor will develop to
determine who gets and who
does not
 Wait list, discrimination,

bribery, luck
Price Floors
A minimum price that must be
paid for a good or service
Governments wants sellers to
receive some reward for their
efforts
Minimum Wage
Most well known price floor
Employers must pay at least a
certain rate per hour
Minimum Wage
 If set above market equilibrium it
will decrease the quantity of labor
supplied
 Results in excess supply =

more people looking for work at


the wage than employers will
hire

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