Chapter 6
Demand, Supply, and Prices
Section 1
• Seeking Equilibrium: Demand and Supply
The Interaction of Demand and Supply
As buyers and sellers interact the market moves towards a market
equilibrium
 Where the quantity supplied at a certain price matches the quantity demanded at that
price
This can produce an equilibrium price where the price is equal between the
quantity supplied and quantity demanded.
Market Demand and Supply Schedule
Market Demand and Supply Curve
Reaching the Equilibrium Price
In order to reach an equilibrium price markets generally go through a
surplus (quantity supplied greater than quantity demanded) or a shortage
(quantity supplied lesser than the quantity demanded)
Through trial and error equilibrium is finally reached
Surplus is measured by a horizontal ABOVE the equilibrium.
When there is a surplus prices tend to drop until the surplus is sold
Reaching the Equilibrium Price
A shortage is measured by a horizontal line BELOW the equilibrium price
A shortage is when not enough products are produced
When a shortage takes place prices generally rise until the quantity supplied
matches the quantity demanded
Reaching the Equilibrium Price
Equilibrium Price in Real Life
• Anytime there is an imbalance in quantity demand and quantity supplied you
have disequilibrium and the process of finding equilibrium starts over
again.
Section 2
•Prices as Signals and Incentives
How the Price System Works
Competitive Pricing occurs when producers sell goods and services at
prices that best balance the twin desires of making the highest profit and
luring customers away from rival producers
How the Price System Works
There are 4 characteristics of a price system:
 1. It is neutral – prices don’t favor either the producer or consumer
 2. It is market driven – market forces, not central planning determine prices
 3. It is flexible – When market conditions change prices are able to change quickly
 4. It is efficient – Prices will adjust until the maximum number of goods and services
are sold.
Prices Motivate Producers and Consumers
Because of the basic laws of supply and demand Consumers want to buy
items at the lowest possible prices and producers want to get the maximum
amount of profit possible at the same time they put into play incentives or a
way to encourage people to take a certain action.
Prices Motivate Producers and Consumers
 For producers the price system has 2 major advantages: It provides both
information and motivation
 Prices act as signals and incentives for consumers as well.
 Advertising from producers
 Encouragement that low prices wont last and they need to buy now or lose the opportunity
 High prices discourage consumers
 Price is the most important factor but the other influences from producers on consumers
also effects consumers
Section 3
• Intervention in the Price System
Imposing Price Ceilings
Sometimes in order to prevent a price from getting to high people set a
price ceiling (limit to how high a price can go)
An example : College Football tickets : If you sale them for $30 a ticket for a
50,000 seat stadium and 100,000 people want tickets you could naturally let
ticket prices rise until the demand equaled the number of tickets being sold
OR you could set a price ceiling and let the demand remain higher than the
supply.
Setting Price Floors
A price floor is opposite of a price ceiling and sets the absolute minimum
price an item can be sold at.
Minimum wage is an example of a price floor stating the absolute minimum
that a business must pay their employees.
If a minimum wage is set to high then businesses may feel it is not profitable
to hire more workers they will hire less employees.
Rationing Resources and Products
Rationing is a system in which the government allocates goods by a means
other than price to the people.
 This is generally in a Communist type society where everyone gets the same goods and
services so the Government rations (distributes) them out equally to the people
When this happens a lot of time people will go to a black market (where
goods and services are illegally bought and sold in violation of price controls
or rationing)