CHAPTER 6
PRICE: Supply and Demand
Together
Moving to Equilibrium
Supply and demand work together to determine price. For
example, they work together to determine the price of corn at
an auction.
A surplus occurs when the quantity supplied of a good is
greater than the quantity demanded. Surpluses occur only at
prices above the equilibrium price.
• Prices fall when a surplus occurs, because suppliers hope to
sell their inventory, or the excess stock of goods that they
have on hand.
Supply and Demand at Work at an Auction
Only at a price of $4 is the quantity demanded
equal to the quantity supplied.
When:
Quantity supplied (Qs) > Quantity demanded (Qd) = Surplus
Qd > Qs = Shortage
Qd = Qs = Equilibrium
A shortage occurs when the quantity demanded of a good is
greater than the quantity supplied. Shortages occur only at
prices below equilibrium price. A shortage is the opposite of a
surplus.
• Prices rise when there is a shortage. Buyers will offer to
pay a higher price to get sellers to sell to them rather than to
other buyers.
A market is considered to be in equilibrium when the quantity
of a good that buyers are willing and able to buy is equal to the
quantity that sellers are willing and able to produce and offer
for sale. When a market reaches equilibrium, quantity
demanded equals quantity supplied.
• The equilibrium quantity is the amount of a good that is
bought and sold in a market that is in equilibrium.
• The equilibrium price is the price at which a good is
bought and sold in a market that is in equilibrium.
What Causes Equilibrium Prices to Change?
Either supply or demand must change in order for the
equilibrium price to change.
• Demand can cause changes to the equilibrium price. If
there is greater demand for a particular good, buyers are
willing to pay a higher price to obtain that good.
• Supply can also cause changes to the equilibrium price. If
the supply for a particular good exceeds the demand—a
surplus exists—the price will decrease until it reaches an
equilibrium price.
Moving to Equilibrium
Changes in Supply and in Demand at the Same Time
So far, we have looked at situations where either supply or
demand has changed. Often, both supply and demand are
constantly changing. The change in equilibrium price will be
determined by which changes more, supply or demand. If
demand increases more than supply, the equilibrium price goes
up.
Does It Matter if Price Is at Its Equilibrium Level?
When price is at its equilibrium level, there are no shortages or
surpluses of any goods or services. All buyers and sellers are
happy with the market.
Price Is a Signal
Price serves as a signal that directs the allocation of resources
toward producing the product with the highest demand.
What Are Price Controls?
Sometimes the government prevents markets from reaching an
equilibrium price. It may do so by setting a price ceiling or a
price floor.
A price ceiling is a price that is set lower than the equilibrium
price. Buyers and sellers cannot legally buy and sell a good for
more than this price. A government may set a price ceiling if it
wants to make a good cheaper for consumers to buy.
• The government can also set a price floor, which is a price
that is set above the equilibrium price. Buyers and sellers
cannot legally buy and sell a good for less than this price. A
government may set a price floor to assist a certain group of
producers.
Price Controls and the Amount of Exchange
Price ceilings and price floors have the unintended result of
reducing the amount of trade in the economy.
Price Controls
Price ceiling
Price floor
A price ceiling creates a shortage
and reduces the quantity of a good
bought and sold.
Example: Rent Control
A price floor creates a surplus and
reduces the quantity of the good
bought and sold.
Example: Minimum Wage
Supply and Demand in Everyday Life
Why the Long Lines for Concert Tickets?
When some people are unable to purchase a good that they are
willing and able to purchase, it means that quantity demanded
exceeds quantity supplied. The result is a shortage in the
market.
The Difference in Prices for Candy Bars, Bread, and Houses
In general, the price of many consumer goods is consistent
throughout the United States. You can expect to pay
approximately the same for a candy bar, or a loaf of bread, in
any state.
Real estate prices demonstrate the impact of supply and
demand.
• A house in San Francisco, California, will sell for
approximately three to four times the price of a similar
house in Louisville, Kentucky.
• Why don’t these two houses move toward an equilibrium
price?
• Because of supply and demand. The houses come with
the land on which they are built, and suppliers cannot
pick up the land and move it to an area where there is
higher demand.
When the supply of a good cannot be moved in response to a
difference in price between cities, as in our real estate example,
prices for this good are likely to remain different in different
cities.
Supply and Demand at the Movies
Have you noticed that ticket prices to see a movie on Friday
night are different than ticket prices for Sunday afternoon? A
theater has a fixed number of seats. In response to higher
demand on Friday night, it charges a higher price for those
tickets.
Supply and Demand on a Freeway
Most of the time, traffic is able to move freely on the freeway.
However, during rush hour, the demand for freeway space
increases. This results in a shortage of space and in slower
traffic.
One solution to freeway congestion is to build more freeways.
• Building more freeway space will increase the supply,
helping to meet demand.
Another is to convince people to carpool.
• Carpooling will reduce the demand, helping to reduce or
eliminate the shortage.
Yet another solution to freeway congestion is to charge a toll
for freeway use.
Supply and Demand on the Gridiron
Supply and demand even plays a part in high school athletics.
There are a limited number of spots on some teams, and
several people may compete for each spot. Athletes will have
to train harder and impress the coaches to secure a spot when
demand exceeds supply.
Supply and Demand on the College Campus
Some colleges require higher GPAs or higher standardized test
scores to gain admission. A college that is in high demand will
have higher entrance requirements.
Necessary Conditions for a High Income: High Demand,
Low Supply
To earn a high wage, a person must perform a job that is in
high demand and that not many other people can do. If few
know how to do the job, then supply will be low. Low supply
and high demand will result in relatively higher wages.
Practice Graphs
Price
1. Event: The price of snow skis goes up.
S
D
Quantity
Ski Boots
The equilibrium price of ski boots goes _______ and the
equilibrium quantity of ski boots goes _____________.
Practice Graphs
1. Event: The price of snow skis goes up.
Price
Reason:
Demand shifts
because of the
price of related
goods.
S
D
Quantity
Ski Boots
The equilibrium price of ski boots goes DOWN and the
equilibrium quantity of ski boots goes DOWN.
Practice Graphs
Price
2. Event: The Atkins low-carb diet sweeps the nation.
S
D
Quantity
Hamburger
The equilibrium price of hamburger goes _______ and the
equilibrium quantity of hamburger goes _____________.
Practice Graphs
2. Event: The Atkins low-carb diet sweeps the nation.
Price
Reason:
Demand shifts
because of
preferences /
trends.
S
D
Quantity
Hamburger
The equilibrium price of hamburger goes UP and the
equilibrium quantity of hamburger goes UP.