Combining Supply and
Demand
In this lesson, students will be able to identify
factors which lead to equilibrium or disequilibrium in
a market.
Students will be able to identify and/or define the
following terms:
Equilibrium
Disequilibrium
Excess Demand
Excess Supply
Price Ceiling
Price Floor
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Do you notice the point where supply
and demand intersect?
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Equilibrium
• When creating a demand curve and a
supply curve, there is a point where the
curves intersect. This point is the
equilibrium point.
• Equilibrium occurs when the quantity
demanded equals the quantity supplied.
• A market is stable at equilibrium.
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If a seller has seven donuts on the shelf
at $1 per donut, and consumers only want
seven donuts at that price, then the market
is at equilibrium.
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Disequilibrium
• A market is at disequilibrium when the
quantity demanded does not equal the
quantity supplied.
• If quantity demanded is greater than
quantity supplied, excess demand occurs.
• If quantity supplied is greater than quantity
demanded, excess supply occurs.
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Low prices encourage consumers. Low
prices can create excess demand.
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Excess Demand
• Excess demand occurs when the actual
price is lower than the equilibrium price.
• Low prices encourage demand.
• To fix this problem, prices must be raised.
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If every parent wants to purchase this toy
for the holidays, excess demand can occur.
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However, if no one is buying, then
excess supply occurs.
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Excess Supply
• Excess supply occurs when quantity
supplied is greater than quantity
demanded.
• The actual price is higher than the
equilibrium price.
• To fix this problem, prices must be
lowered.
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The day after Valentine’s Day, consumers
will not pay high prices for Valentine’s
candy.
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Price Ceiling
• A price ceiling is the maximum price that
can be legally charged for a good or
service.
• The government interferes with market
equilibrium when it creates a price ceiling.
• Rent control is an example of a price
ceiling.
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Rent control is an example of a price
ceiling.
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Price Floor
• A price floor is the minimum price that can
be legally charged for a good or service.
• The government interferes with market
equilibrium when it creates a price floor.
• Minimum wage is an example of a price
floor.
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The minimum wage is an example of
a price floor.
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If there are lots of apples in the market
and little demand for apples, market
disequilibrium occurs.
Let’s Review Equilibrium!
• Equilibrium occurs when quantity supplied
equals quantity demanded.
• Economists state that a market will tend
toward equilibrium.
• This means that price and quantity will
gradually move towards their equilibrium
levels.
Equilibrium is the point where the supply
curve intersects the demand curve.
Let’s Review Disequilibrium!
• Disequilibrium occurs when the quantity
supplied does not equal the quantity
demanded.
• Disequilibrium occurs when the price is not
right.
• If the price is too high or too low for that
particular market, disequilibrium occurs.
The original equilibrium price does not
work when the supply curve shifts.
Surplus
• A surplus occurs when quantity supplied is
greater than quantity demanded.
• Another term for surplus is excess supply.
• When a surplus occurs, the price must be
lowered to restore the market to
equilibrium.
Too many cookies and not enough
consumers creates a surplus.
Shortage
• A shortage is a situation in which quantity
demanded is greater than quantity
supplied.
• Another term for shortage is excess
demand.
• When a shortage occurs, prices must be
raised to restore the market to equilibrium.
When quantity demanded is created than
quantity supplied, a shortage occurs.
Prices
• Market disequilibrium occurs when the
price is not right for that particular market.
• If the price is too low for that particular
market, demand is encouraged and
shortage occurs.
• If the price is too high for that particular
market, demand is discouraged and
surplus occurs.
Prices are like
the lights on
a traffic light.
Prices are signals
for buyers and
sellers.
High Prices
• High prices send different signals to
consumers and suppliers.
• Consumers view high prices as a red light.
• Suppliers view high prices as a green light.
Consumers view
high prices as
a red light because
when prices are
high, money buys
less.
However, suppliers
view high prices
as a green light because
high prices signify
greater profits.
Low Prices
• Low prices also send different signals to
consumers and suppliers.
• Consumers love low prices.
• Suppliers are discouraged by low prices.
Low prices encourage
consumers.
Low prices allow
consumers to increase
their purchases. Money
buys more at lower prices.
Low prices
discourage
suppliers.
Low prices
lead to
decreased
profits.
The Flexibility of Price
• Fortunately, price is flexible and can be
easily changed.
• Market equilibrium can be restored by
changing the price of a good or service.
• The flexibility of price allows for market
equilibrium to be restored easily.
Flexible prices restore equilibrium.
Rationing
• Rationing is a system where the
government allocates all goods and
services.
• People do not buy goods and services.
• Rationing is not based on price.
• Centrally planned economies use
rationing.
During World War II, the United
States’ government used rationing
of some products.
Rationing is costly to administer because
it requires government planning.
Questions for Reflection:
• When does equilibrium occur in a market?
• Why does excess demand create
disequilibrium in the market?
• Define excess supply.
• Why does the government place a price
ceiling on rent?
• How does rent control help some but hurt
others?
• Provide an example of a price floor.
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