Unit 2: Supply, Demand, and
Consumer Choice
1
Market Equilibrium
1.What is market equilibrium?
2. What is a surplus?
3.What must producers do when they realize
that they have a surplus?
4. What is a shortage?
5. How should producers change strategy to
deal with a shortage?
Government
Involvement
3
PRICE CONTROLS
Who likes the idea of having a price ceiling on
gas so prices will never go over $2 per gallon?
4
Price Ceiling
Maximum legal price a seller can charge for a product.
Goal: Make affordable by keeping price from reaching Eq.
P
Gasoline
S
$5
Does this
4
policy help
consumers?
3
Result:
BLACK
Price
MARKETS 2
Ceiling
Shortage
1
(Qd>Qs)
D
To have an effect,
a price ceiling must be
below equilibrium
o
10
20
30
40
50
60
70
80
Q
5
Price Ceilings
Example:
› The city of Griffin could set a limit for the
price of rent on two-bedroom
apartments at $600 a month. No one
may charge more than this price ceiling.
 What affect will this have on the apartment
rentals in town?
There will be fewer apartments available to rent.
Apartment owners have no incentive to build new
apartments that they cannot profit from.
Price Floor
Minimum legal price a seller can sell a product.
Goal: Keep price high by keeping price from falling to Eq.
P
Corn
S
$
Surplus
(Qd<Qs)
To have an effect,
Price Floor
a price floor must be
Does this above equilibrium
4
3
policy help
corn
producers?
2
1
o
D
10
20
30
40
50
60
70
80
Q
7
Price Floor
• Example:
– Minimum Wage-This is the lowest rate at
which employers can pay their workers in
most industries.
• How can minimum wage laws raise
unemployment?