6-1 Combining Supply and Demand
•How do supply and demand create balance in the
marketplace?
•What are differences between a market in equilibrium
and a market in disequilibrium?
•What are the effects of price ceilings and price floors?
Balancing the Market
Just as buyers and sellers come together in a market, demand
and supply come together in this section.

The point at which quantity demanded and quantity supplied
come together is known as equilibrium (QS = QD).

Finding Equilibrium
Equilibrium Point
Combined Supply and Demand Schedule
$3.50
$2.50
Price of
a slice
of pizza
Quantity
demanded
Quantity
supplied
$2.00
$ .50
300
100
$1.00
250
150
$1.50
200
200
$2.00
150
250
$2.50
100
300
$3.00
50
350
Equilibrium
Price
$1.50
$1.00
$.50
Supply
0
50
a
Equilibrium
Quantity
Price per slice
$3.00
Demand
100 150 200 250 300
Slices of pizza per day
Result
Shortage from
excess demand
Equilibrium
Surplus from
excess supply
350
• At the equilibrium price, buyers will purchase exactly as much
as firms are willing to sell.
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:
1.) Excess Demand
•Excess demand occurs when
quantity demanded is more than
quantity supplied (when price is
too low).
2.) Excess Supply
•Excess supply occurs when
quantity supplied exceeds
quantity demanded (when price
is too high).
Market Disequilibrium
Excess Demand
Excess demand occurs
when quantity demanded is
more than quantity
supplied (when price is too
low).
Market Disequilibrium
Excess Supply
Excess supply occurs
when quantity supplied
exceeds quantity
demanded (when price
is too high).
Price Ceilings
In some cases the government steps in to control
prices. These interventions appear as price ceilings and
price floors.
•A price ceiling is a
maximum price that can be
legally charged for a good.
•An example of a price ceiling is
rent control, a situation where a
government sets a maximum
amount that can be charged for
rent in an area.
•This leads to excess demand
and many economists argue that
it hurts those it intends to assist.
Are Price Ceilings Good or Bad?
Rent Control
At the price of $200,
landlords will supply 20
apartments (QS), but renters
demand 40 apartments (QD).
There is a shortage of 20
apartments. Many renters will
be left out.
Landlords may try and
increase profits by cutting
costs and apartment
conditions may worsen.
Without rent control, price
would rise to $300 and 10
more apartments would
become available. However,
some renters may not be
able to afford the higher
price.
Price Floors
•A price floor is a minimum price,
set by the government, that must
be paid for a good or service
(minimum wage).
•One well-known price floor is
the minimum wage, which sets a
minimum price that an employer
can pay a worker for an hour of
labor. Leads to excess supply.
Are Price Floors Good or Bad?
Minimum Wage
At $4, employers demand 20
workers (QD), but there is a
supply 40 workers (QS). There
is an excess supply of 20
people looking for work at $4.
If the market were left alone,
the market price for workers
would fall to $3, but 10 more
workers would find a job as
employers could afford to hire
more workers.
However, for many people, a
lower wage would not be
enough to pay bills and
support a family.
Michigan’s Minimum Wage
Michigan’s minimum wage is
$7.40 per hour. Imagine you
are a policy maker and you
must vote whether it be
raised, lowered, or abolished.
What will you decide? Why?
Show how your decision will
look when graphed.
Refer to notes as well as
p.130-131 to help you with
your decision and graph.
Section 1 Assessment
1. Equilibrium in a market means which of the following?
(a) the point at which quantity supplied and quantity demanded are the same
(b) the point at which unsold goods begin to pile up
(c) the point at which suppliers begin to reduce prices
(d) the point at which prices fall below the cost of production
2. The government’s price floor on low wages is called the
(a) market equilibrium
(b) base wage rate
(c) minimum wage
(d) employment guarantee
Section 1 Assessment
1. Equilibrium in a market means which of the following?
(a) the point at which quantity supplied and quantity demanded are the same
(b) the point at which unsold goods begin to pile up
(c) the point at which suppliers begin to reduce prices
(d) the point at which prices fall below the cost of production
2. The government’s price floor on low wages is called the
(a) market equilibrium
(b) base wage rate
(c) minimum wage
(d) employment guarantee
6-2 Changes in Market Equilibrium
•How do shifts in supply affect market equilibrium?
•How do shifts in demand affect market equilibrium?
•How can we use supply and demand curves to analyze
changes in market equilibrium?
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.
•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.
•A Fall in Supply
• The exact opposite will occur when supply is decreased. As
supply decreases, producers will raise prices and demand will
decrease.
Shifts in Demand
•Excess Demand
• A shortage is a situation in which quantity demanded is greater
than quantity supplied.
•Search Costs
• Search costs are the financial and opportunity costs
consumers pay when searching for a good or service.
•A Fall in Demand
• When demand falls, suppliers respond by cutting prices, and a
new market equilibrium is found.
Analyzing Shifts in Supply and Demand
Graph A: A Change in Supply
$800
a
b
Price
$600
Original
supply
c
$400
$200
New
supply
Demand
0
1
2
3
Output (in millions)
4
5
When it became cheaper to
make CD players, the supply
curve shifted to the right. An
increase in QS at the old
equilibrium price is shown as a
change from point (a) to point
(b). However, the QD at this
price has not changed, and
consumers will only buy 2
million disc players. Suppliers
will have to bring price down to
get rid of a surplus of CD
players. The price drops and we
get to point (c) where
equilibrium is restored.
•Graph A shows how the market finds a new
equilibrium when there is an increase in supply.
Analyzing Shifts in Supply and Demand
Graph B: A Change in Demand
$60
Supply
$50
$40
Price
When Tickle Me Elmo
dolls became popular
there was a sudden shift
in demand to the right.
This shift leads to excess
demand at the original
price of $24 (b). At (b),
there is a shortage of 200
thousand dolls (a). Long
lines and empty shelves
will result. Suppliers will
increase the price and a
new equilibrium will
naturally set at (c).
c
$30
a
b
$20
New
demand
Original
demand
$10
0
100
200
300
400
500
600
700
800
900
Output (in thousands)
• Graph B shows how the market finds a new equilibrium
when there is an increase in demand.
Section 2 Assessment
1. When a new equilibrium is reached after a fall in demand, the new equilibrium has a
(a) lower market price and a higher quantity sold.
(b) higher market price and a higher quantity sold.
(c) lower market price and a lower quantity sold.
(d) higher market price and a lower quantity sold.
2. What happens when any market is in disequilibrium and prices are flexible?
(a) market forces push toward equilibrium
(b) sellers waste their resources
(c) excess demand is created
(d) unsold perishable goods are thrown out
Section 2 Assessment
1. When a new equilibrium is reached after a fall in demand, the new equilibrium has a
(a) lower market price and a higher quantity sold.
(b) higher market price and a higher quantity sold.
(c) lower market price and a lower quantity sold.
(d) higher market price and a lower quantity sold.
2. What happens when any market is in disequilibrium and prices are flexible?
(a) market forces push toward equilibrium
(b) sellers waste their resources
(c) excess demand is created
(d) unsold perishable goods are thrown out
6-3 The Role of Prices
•What role do prices play in a free market system?
•What advantages do prices offer?
•How do prices allow for efficient resource allocation?
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
buyers.
•Prices create efficient resource allocation for producers
and a language that both consumers and producers can
use.
Advantages of Prices
Prices provide a language for buyers and sellers.
1. Prices as an Incentive: Prices communicate to both buyers and sellers whether
goods or services are scarce or easily available. Prices can encourage or
discourage production.
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.
3. Flexibility: Prices are much more flexible than production levels. They can be
easily increased or decreased to solve problems of excess supply or excess
demand. A supply shock, or sudden shortage of a good like gas or wheat, can be
solved by raising prices to thwart off excess demand.
4. Price System is "Free” Unlike central planning, a distribution system based on
prices costs nothing to administer. Prices help goods flow through the economy
without a central plan.
Section 3 Assessment
1. How does a supply shock affect equilibrium price and quantity?
(a) Raises prices and decreases quantity demanded
(b) Raises prices and increases quantity demanded
(c) Lowers prices and increases quantity demanded
(d) Lowers prices and decreases quantity demanded
.
Section 3 Assessment
1. How does a supply shock affect equilibrium price and quantity?
(a) Raises prices and decreases quantity demanded
(b) Raises prices and increases quantity demanded
(c) Lowers prices and increases quantity demanded
(d) Lowers prices and decreases quantity demanded