Economics
Chapter 6
Demand, Supply, and Prices
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Economics
Chapter 6
Chapter 6: Demand, Supply, and Prices
KEY CONCEPT
• The equilibrium price is the price at which quantity demanded and quantity supplied are
the same.
WHY THE CONCEPT MATTERS
• In a market economy, the forces of demand and supply work together to set a price that
buyers and sellers find acceptable.
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Economics
Chapter 6
Section-1
Seeking Equilibrium: Demand and Supply
The Interaction of Demand and Supply
KEY CONCEPTS
• Market equilibrium
— at a certain price, quantity demanded and quantity supplied are equal
• Equilibrium price
— price at which quantity demanded and quantity supplied are equal
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Economics
Chapter 6
The Interaction of Demand and Supply
EXAMPLE: Market Demand and Supply Schedule
• Laws of demand and supply interact in the market
• Karen sells salads at her sandwich shop
— wants to offer more salads at higher prices to earn more profit
— customers not willing to pay higher prices for salads
— Karen seeks highest price customers will pay so she can still make profit
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Economics
Chapter 6
The Interaction of Demand and Supply
EXAMPLE: Market Demand and Supply Curve
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Vertical axis shows various prices
Horizontal axis shows quantity of product
Combined schedule gives prices, quantities for demand, supply curves
Two curves intersect at point of market equilibrium
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Economics
Chapter 6
Reaching the Equilibrium Price
KEY CONCEPTS
• Trial and error may be necessary for market to arrive at equilibrium
— Market may have surplus—more quantity supplied than demanded
— Market may have shortage—more quantity demanded than supplied
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Economics
Chapter 6
Reaching the Equilibrium Price
EXAMPLE: Surplus, Shortage, and Equilibrium
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Surplus, shortage shown above and below point of equilibrium
Surplus, shortage measured by horizontal distance between two curves
With surplus, prices tend to fall; producers cut back production
With shortage, prices rise; producers increase quantity supplied
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Economics
Chapter 6
Reaching the Equilibrium Price
EXAMPLE: Holiday Toys
• Marketers sometimes overestimate popularity, others underestimate
• Tickle Me Elmo doll introduced for holidays in 1996
— at first sold slowly at $30; seemed stores would have surplus
— fad caught on; shortage developed, price went up
— by spring, supply doubled; demand decreased, price dropped to $25
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Economics
Chapter 6
Equilibrium Price in Real Life
KEY CONCEPTS
• disequilibrium
— imbalance between quantity demanded and quantity supplied
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Economics
Chapter 6
Equilibrium Price in Real Life
EXAMPLE: Change in Demand and Equilibrium Price
• Decrease in demand at every price shifts demand curve to left
— demand curve intersects supply curve at lower price
— equilibrium price falls, fewer units sold even though price is lower
• With increase in demand, demand curve shifts to right
— equilibrium price rises, more units sold even at higher prices
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Economics
Chapter 6
Equilibrium Price in Real Life
EXAMPLE: Change in Supply and Equilibrium Price
• If supply at every price decreases, supply curve shifts to left
— curves intersect at higher price: equilibrium price rises
• If supply increases, supply curve shifts to right
— equilibrium price falls as more units available at every price
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Economics
Chapter 6
Reviewing Key Concepts
Explain the differences between the terms in each of these pairs:
• market equilibrium and disequilibrium
• surplus and shortage
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Economics
Chapter 6
Section-2
Prices as Signals and Incentives
How the Price System Works
KEY CONCEPTS
• Competitive pricing—selling products at lower prices than others
— lures customers away from rival producers
— maintains overall profits by selling more units
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Economics
Chapter 6
How the Price System Works
EXAMPLE: Competitive Pricing
• Elm Street Hardware prices snow shovels at $20
• Uptown Automotive enters market, sells shovels at $13
— has lower profit margin, but hopes to sell more units
• Elm Street must choose to lower price or risk losing customers
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Economics
Chapter 6
How the Price System Works
EXAMPLE: Characteristics of the Price System
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Neutral: interaction of consumers, producers sets equilibrium price
Market driven: market forces, not central planners determine prices
Flexible: surpluses, shortages lead producers to change prices
Efficient: prices adjust until maximum number of products sold
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Economics
Chapter 6
Prices Motivate Producers and Consumers
KEY CONCEPTS
• Prices motivate consumers and producers in different ways
• Incentive encourages people to take a certain action
• In price system, incentives move producers and consumers
— both act in ways consistent with own best interests
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Economics
Chapter 6
Prices Motivate Producers and Consumers
EXAMPLE: Prices and Producers
• Prices signal whether it is good time to enter or leave a market
— Rising prices create expectation of profits, leading producers to enter
— Falling prices and possibility of losses lead producers to leave
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Economics
Chapter 6
Prices Motivate Producers and Consumers
EXAMPLE: Prices and Consumers
• Surpluses result in lower prices that motivate consumers to buy
— producers signal to consumers through advertising, store displays
• High prices usually encourage consumers to buy substitutes
— may signal shortage of a product
— may signal product has a higher status than others
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Economics
Chapter 6
Michael Dell: Using Price to Beat the Competition
Lowering Costs to Reduce Prices
• Dell bypassed retailers, sold directly over telephone
• Each computer built to customer requirements after ordered
— this lowered costs, Dell became low-price leader in market
• Internet sales pioneer—close customer contact, easy to adjust prices
• Dell now entering consumer electronics market
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Economics
Chapter 6
Reviewing Key Concepts
Use each of the terms below in a sentence that illustrates the meaning of the term:
• competitive pricing
• incentive
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Economics
Chapter 6
Section-3
Intervention in the Price System
Imposing Price Ceilings
KEY CONCEPTS
• Government interferes to keep some prices from going too high
• Price ceiling—legal maximum price a seller may charge for a product
— set below the equilibrium price, so shortage results
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Economics
Chapter 6
Imposing Price Ceilings
EXAMPLE: Football Tickets and Price Ceilings
• College sells 30,000 football tickets at $15
— 60,000 fans want tickets
• College could resolve shortage by raising price to reach equilibrium
• College wants to keep price affordable for students
• On game day, some people sell tickets for $50 or more
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Economics
Chapter 6
Imposing Price Ceilings
EXAMPLE: Rent Control as a Price Ceiling
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Rent-control laws kept housing affordable for low-income families
Rents did not match market, so shortage of rental housing developed
Landlords unwilling to increase own costs by maintaining properties
City of Santa Monica solution: let market set initial rent
— rent control board regulates yearly increases
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Economics
Chapter 6
Setting Price Floors
KEY CONCEPTS
• Government intervenes to increase income to certain producers
• Price floor—legal minimum price buyers may pay for product
• Various programs protect agricultural products
— encourage farmers to produce abundant supply of food
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Economics
Chapter 6
Setting Price Floors
EXAMPLE: Minimum Wage as a Price Floor
• Minimum wage—least amount employer may pay for one hour of work
— set by government
• If set above equilibrium price for job, employers may employ fewer workers
— unemployment increases
• If set below equilibrium price, minimum wage has no effect
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Economics
Chapter 6
Rationing Resources and Products
KEY CONCEPTS
• In national emergency, government may distribute products, resources
• Rationing—way of allocating products using factors other than price
• Black market—illegal buying and selling of products
— violates price controls, rationing
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Economics
Chapter 6
Rationing Resources and Products
EXAMPLE: Rationing Resources
• During WWII, U.S. rationed consumer goods so all could afford them
— allocated resources toward war effort, not consumers
• From 1946–2002, North Korea strict rationing; system inefficient, corrupt
— In 1996–2000, widespread famine; people set up unofficial markets
— In 2002, markets legalized; prices, wages rose; government may turn back
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Economics
Chapter 6
Rationing Resources and Products
EXAMPLE: Black Markets—An Unplanned Result of Rationing
• Black markets common result of rationing;
— in U.S. during WWII, black market for scarce goods developed
• Pre-2002 North Korea, trade of most products forbidden or restricted
— on the whole, black market prices very high
— post-2002 black market continues since many products still illegal
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Economics
Chapter 6
Reviewing Key Concepts
Explain the relationship between the terms in each of these pairs:
• price floor and minimum wage
• rationing and black market
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Economics
Chapter 6
Case Study: Prices for Concert Tickets
Background
• Less affluent fans cannot afford concerts, yet ticket prices rising
• Ticket prices cover costs profit for performers, venues, distributors
What’s the Issue?
• How do demand, supply, and pricing affect the concert ticket market?
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Economics
Chapter 6
Case Study: Prices for Concert Tickets {continued}
Thinking Economically
1. Do you think TicketMaster’s plan in document C would help or harm Pearl Jam’s wish “that
no one will pay more than $20” to see them (document A)? Explain.
2. What do you think happened to quantity supplied of tickets over the span of the graph in
document B? Why?
3. In what year in Figure 6.15 did the high price for concert tickets hit $50—the high price that
Pearl Jam speaks of in document A? What year was it $20—the desired price they mention?
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Economics
Chapter 6
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