Prices and
Equilibrium
Chapter 6
• The monetary value of a product as
established by supply and demand.
• Turn to a partner in the room and have
a discussion. Answer the questions:
• Are prices fair?
• Should the government help dictate
prices?
• In what situations do you think
government should dictate prices?
Prices
• Prices link the producers and consumers; and
allow allocation of goods and services to be
smooth and efficient.
• Advantages of prices
• There is neither a favor in producers, nor
consumers
• Prices are flexible and allow economy to
accommodate change
• No Cost in administration
• Familiar and easily understood
Advantages Prices
• What would be done if we did
not use price as a means to
distribute goods and services?
What options exist?
Without Price
• A system under which an agency such as
the government decides everyone’s
“fair” share.
• People receive Ration Coupons, which is
a ticket or a receipt that entitles the
holder to obtain a certain amount of a
product.
• What are all the problems with
rationing?
Rationing
• After reading the information on
page 140 about prices as a system,
explain in your own words how
prices act as a system which tells
the market where resources should
be allocated.
Prices as a System
• Take the large piece of paper and
fold it in half three separate times to
create 8 squares/sections for use of
drawing graphs.
Graphing Market Demand
and Supply Curves
• Draw a graph which has price labeled on the
Y-axis and Quantity labeled on the X-axis.
Then draw an example Demand Curve and an
example Supply Curve in the graph.
• Use the graph to draw in a point labeled “E”
where one would find Market equilibrium.
• Explain off to the side what Market
equilibrium is and what Price Equilibrium
means.
Square #1: Market
Equilibrium
• Draw a graph which has price labeled on the
Y-axis and Quantity labeled on the X-axis.
Then draw an example Demand Curve and an
example Supply Curve in the graph.
• Find a price on the graph that would display a
surplus of a product.
• What is a surplus?
• What will tend to happen if a surplus does
exist?
Square #2: Surplus
• Draw a graph which has price labeled on the
Y-axis and Quantity labeled on the X-axis.
Then draw an example Demand Curve and an
example Supply Curve in the graph.
• Find a price on the graph that would display a
shortage of a product.
• What is a shortage?
• What will tend to happen if a shortage does
exist?
Square #3: Shortage
• Draw a graph which has price labeled on the Y-axis and
Quantity labeled on the X-axis. Then draw an example
Demand Curve and an example Supply Curve in the
graph.
• Use a different color pen/pencil and draw a line
representing an increase in Supply. Using the same color
pen/pencil, write down what happens to the price and the
quantity because of this increase in supply.
• Use a different color pen/pencil and draw a line
representing an decrease in Supply. Using the same color
pen/pencil, write down what happens to the price and the
quantity because of this decrease in supply.
Square #4: Changes in
Supply
• Draw a graph which has price labeled on the Y-axis and
Quantity labeled on the X-axis. Then draw an example
Demand Curve and an example Supply Curve in the
graph.
• Use a different color pen/pencil and draw a line
representing an increase in demand. Using the same color
pen/pencil, write down what happens to the price and the
quantity because of this increase in demand.
• Use a different color pen/pencil and draw a line
representing an decrease in demand. Using the same color
pen/pencil, write down what happens to the price and the
quantity because of this decrease in demand.
Square #5: Changes in
Demand
• Draw a graph which has price labeled on the
Y-axis and Quantity labeled on the X-axis.
Then draw an example Demand Curve and an
example Supply Curve in the graph.
• Use the graph to display a Price Ceiling.
• Explain what a price ceiling is and what is
created by a price ceiling.
• Explain the example of Rent Controls and
how it must abide by price ceilings.
Square #6: Price Ceilings
• Draw a graph which has price labeled on the
Y-axis and Quantity labeled on the X-axis.
Then draw an example Demand Curve and an
example Supply Curve in the graph.
• Use the Graph to display Price Floors.
• Explain what a price floor is and what is
created by a price floor.
• Explain the example of minimum wage and it
must abide by a price floor.
Square #7: Price Floors