#### Transcript Prices - Fort Bend ISD

```Combining Supply and Demand
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Ch 6.1
2
Balancing the Market
The point at which quantity demanded and
quantity supplied come together is known as
equilibrium.
Finding Equilibrium
Equilibrium Point
Combined Supply and Demand Schedule
\$3.50
\$2.50
Equilibrium
Price
\$2.00
\$1.50
\$1.00
\$.50
Supply
0
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50
a
Equilibrium
Quantity
Price per slice
\$3.00
Price of
a slice
of pizza
Quantity
demanded
Quantity
supplied
\$1.00
\$ .50
250
300
150
100
\$1.50
200
200
\$2.00
150
250
\$2.50
100
300
\$3.00
50
350
Demand
100 150 200 250 300
Slices of pizza per day
Result
Shortage from
excess demand
Equilibrium
Surplus from
excess supply
350
Ch 6.1
3
Market Disequilibrium
If the market price or quantity
supplied is anywhere but at the
equilibrium price, the market is in a
state called disequilibrium.
There are two causes for
disequilibrium:
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Ch 6.1
4
Market Disequilibrium
1. Excess Demand (shortage)
 Excess demand occurs when
quantity demanded is more than
quantity supplied.
2. Excess Supply (surplus)
 Excess supply occurs when quantity
supplied exceeds quantity demanded.
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Ch 6.1
5
Market Disequilibrium
sellers will always push the market
back towards equilibrium.
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Ch 6.1
6
Price Ceilings
In some cases the government
steps in to control prices. These
interventions appear as price
ceilings and price floors.
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Ch 6.1
7
Price Ceilings
A price ceiling is a maximum price that can be
legally charged for a good.
 An example of a price ceiling is rent control,
where a government sets a maximum amount
that can be charged for rent in an area.

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Ch 6.1
8
Price Floors
A
price floor is a minimum price, set by the
government, that must be paid for a good or
service.
 Ex.
minimum wage, which sets a minimum
price that an employer can pay a worker for
an hour of labor.
What is the impact of changing
the minimum wage?
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Ch 6.1
9
Minimum Wage - The Supply & Demand for Labor
D
S
Unemployment
New
Minimum wage
surplus supply
\$7.75
Price
Equilibrium
price & quantity
\$7.50
\$7.25
Current
minimum wage
surplus demand
A B
C
Quantity
Shifts in Supply
 Understanding
a Shift
 Since markets tend toward
equilibrium, a change in supply will
set market forces in motion that lead
the market to a new equilibrium price
and quantity sold.
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Ch 6.2
11
Shifts in Supply
Excess Supply
 A surplus is a situation in which
quantity supplied is greater than
quantity demanded.
 If a surplus occurs, producers reduce
prices to sell their products. This
creates a new market equilibrium.
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Ch 6.3
12
Shifts in Supply
A
Fall in Supply
 The exact opposite will occur when
supply is decreased. As supply
decreases, producers will raise prices
and demand will decrease.
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Ch 6.1
13
Shifts in Demand
 Excess
Demand
 A shortage is a situation in which
quantity demanded is greater than
quantity supplied.
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Ch 6.2
14
Shifts in Demand
A
Fall in Demand
 When demand falls, suppliers respond
by cutting prices, and a new market
equilibrium is found.
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Ch 6.2
15
Analyzing Shifts in Supply and Demand
Graph A: A Change in Supply
Graph B: A Change in Demand
\$800
\$60
a
Supply
\$50
b
Original
supply
\$40
c
Price
Price
\$600
\$400
c
\$30
a
b
\$20
\$200
New
supply
Demand
New
demand
Original
demand
\$10
0
1
2
3
4
0
5
100
Output (in millions)

200
300
400
500
600
700
800
900
Output (in thousands)
Graph A shows how the market finds a new equilibrium when
there is an increase in supply.
Graph B shows how the market finds a new equilibrium when
there is an increase in demand.
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Ch 6.1
16
Shifts in Demand
 Search
Costs
 Search costs are the financial and
opportunity costs consumers pay
when searching for a good or service.
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Ch 6.2
17
The Role of Prices in a Free
Market
 Prices
serve a vital role in a free
market economy.
 Prices help move land, labor, and
capital into the hands of producers,
and finished goods in to the hands of
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Ch 6.3
18
The Role of Prices in a Free
Market
 Prices create efficient resource
allocation for producers in a
language that both consumers and
producers can use.
(the invisible hand)
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Ch 6.3
19
Prices provide a language for buyers
and sellers.
1. Prices as an Incentive
sellers whether goods or services are
scarce or easily available. Encourage or
discourage production.
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Ch 6.3
20
2. Signals
Think of prices as a traffic light. A
relatively high price is a green light
telling producers to make more. A
relatively low price is a red light telling
producers to make less.
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Ch 6.1
21
3. Flexibility
In many markets, prices are much
more flexible than production levels.
They can be easily increased or
decreased to solve problems of excess
supply or excess demand.
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Ch 6.3
22
4. Price System is "Free"
Unlike central planning, a distribution
system based on prices costs nothing
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Ch 6.3
23
Efficient Resource Allocation
 Resource
Allocation
 A market system, with its fully
changing prices, ensures that
resources go to the uses that
consumers value most highly.
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Ch 6.3
24
Efficient Resource Allocation
 Market
Problems
 Imperfect competition can affect
prices and consumer decisions.
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Ch 6.3
25
Efficient Resource Allocation
 Market
Problems
 Spillover costs, or externalities, are
costs of production, such as air and
water pollution, that “spill over” onto
people who have no control over how
much of a good is produced.
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Ch 6.3
26
Efficient Resource Allocation
 Market
Problems
 If buyers and sellers have imperfect
information on a product, they may
not make the best purchasing or
selling decision.
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Ch 6.3
27
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