Chapter 6, Section 1

Objectives

1. Explain how supply and demand create equilibrium in the marketplace.

2. Describe what happens to prices when equilibrium is disturbed.

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What is Equilibrium?

Equilibrium the point at which the demand for a good or service is equal to the supply

• When a market reaches equilibrium, it is stable.

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A “Moving Target”

Equilibrium for most products is

in constant motion.

Think of equilibrium as a

“moving target” that changes

as market conditions change.

As supply or demand increases

or decreases, a new equilibrium

is created for that product.

Chapter 6, Section 1

Disequilibrium

If the market price or quantity supplied is anywhere but at equilibrium, the market is said to be at disequilibrium.

Disequilibrium can produce two possible outcomes:–Shortage— Demand for a good is greater than supply. Prices rise.

–Surplus— Supply for a good is greater than demand. Prices drop.

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Shortage: If D>S, then P ↑

Surplus: If S>D, then P ↓

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How Supply and Demand Affect Equilibrium

Changes in supply and demand cause prices to go up and down, which disrupts the equilibrium for a particular good or service.

In a free market, price and quantity will tend to move toward equilibrium whenever they find themselves in disequilibrium.

Chapter 6, Section 1

Shortages

Shortages cause a firm to raise its prices.

Higher prices cause the quantity supplied to rise.

High prices cause the quantity demanded to fall.

EQUILIBRIUM !

Surpluses

Surpluses cause a firm to drop its prices.

Lower prices cause the quantity supplied to fall.

Low prices cause the quantity demanded to rise.

EQUILIBRIUM !

Chapter 6, Section 1

Key Terms

equilibrium: the point at which the demand for a product or service is equal to the supply of that product or service

disequilibrium: any price or quantity not at equilibrium

shortage: when quantity demanded is more than quantity supplied

surplus: when quantity supplied is more than quantity demanded

Chapter 6, Section 1

Bell Ringer

Who do you think benefits the most from an increase in the minimum wage?

Who benefits the least from (or is hurt by) an increase in the minimum wage?

Chapter 6, Section 1

Objectives

1. Identify two ways that the government intervenes in markets to control prices.

2. Analyze the debate surrounding the federal minimum wage.

Chapter 6, Section 1

Introduction

While markets tend toward equilibrium on their own, sometimes the government intervenes and sets market prices.

The government can control prices in two ways:

Price ceilings

Price floors

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Price Ceiling

Price ceilings- the maximum price that can legally be charged for a good or service

EXAMPLE: Tortillas in Mexico “Tortilla Price Stabilization Pact”

In 2007, President Calderon created an agreement between the Mexican Federal Govt. and several tortilla companies in Mexico to set a price ceiling for corn tortillas at 8.50 pesos/kg ($0.21/lb)

Chapter 6, Section 1

Price Floors

A price floor is a minimum price set by the government.

The minimum wage is an example of a price floor.

Minimum wage affects the demand and the supply of workers.

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Minimum Wage

What is the current federal minimum wage?

$7.25

What is the minimum wage in Arizona?

$10.50

What do you think the minimum wage should be?

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Minimum Wage Argument

How does a minimum wage increase hurt businesses?

– Increased labor costs

– Increased prices (less competitive)

What are some ways businesses can respond to a minimum wage increase?

– Reduce workers

– Less training

– Less health care benefits

– Raise prices

– Live with fewer profits… yeah, right!

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Minimum Wage Argument

How does a minimum wage increase helpbusinesses?

–More competitive workforce

–More productive workers

–More skilled/educated workers

–Increased wages = increased spending

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Minimum Wage Discussion

What is the purpose of a minimum wage? Should there even be a minimum wage?

Assume the minimum wage raises prices but also raises productivity. Is this an acceptable trade-off?

Should the federal minimum wage be increased? Why/why not?

Chapter 6, Section 1

Bell Ringer List three ways that raising the minimum wage

hurts the economy.

List three ways that raising the minimum wage helps the economy.

Chapter 6, Section 1

Objectives

1. Identify the many roles that prices play in a free market.

2. Describe the role of the “black market” in the global economy.

Chapter 6, Section 1

Introduction

What roles do prices play in a free market economy?

– In a free market economy, prices are used to distribute goods and resources throughout the economy.

–Prices play other roles, including:

Serving as a language for buyers and sellers

Serving as an incentive for producers

Serving as a signal of economic conditions

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The Role of Prices

Prices provide a standard of measure of valuethroughout the world.

Prices act as a signal that tells producers and consumers how to adjust.

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The Role of Prices

Prices tell buyers and sellers whether goods are in short supply or readily available.

BP gas station, immediately following Hurricane Katrina

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The Role of Prices

The price system is flexible and free, and it allows for a wide diversity of goods and services.

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The Black Market

Since the government cannot track all of the goods passing through the economy, people sometimes conduct business on the black market in order to bypass rationing and legal restrictions.

Choco Pies in North Korea: https://www.youtube.com/watch?v=UfxOTEqVVaQ

Chapter 6, Section 1

1. When demand is greater than supply for a good, it’s price will always go _______.

2. The above question is an example of a shortage/surplus (choose one).

3. Any time the quantity supplied for a good does not equal the quantity demanded, the market is said to be in ______________.

Equilibrium Quiz

Chapter 6, Section 1

Equilibrium Quiz

4. What happens to the market for marijuana when the DEA makes a huge bust on the border? (Demand/Supply up/down? Price up/down?)

5. What happens to the market for gasoline when the U.S. enters into a recession? (Demand/Supply up/down? Price up/down?)

6. What happens to the market for steak if consumers stop purchasing products made of leather? (Demand/Supply up/down? Price up/down?)