# Chapter 6: Combining Supply and Demand

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1 SCHS SOCIAL STUDIES What you need to know UNIT TWO 1. Explain how supply and demand create balance in the marketplace 2. Explain how a market reacts to a fall in supply by moving to a new equilibrium 3. List the advantages of a price based system 4. Describe the relationship between prices and the profit incentive Terms you should know Equilibrium Disequilibrium Excess of Demand Excess of Supply Price ceiling Price Floor Rent Control Minimum Wage Surplus Shortage Search Costs Supply Shock Black Market Spillover Costs

2 6-1 Summary: Fill in the missing words. A market is the point at which quantity supplied and quantity demanded are equal. At that point, buyers are willing to buy at the same price and quantity at which sellers are willing to sell. This price is the. On a graph, the equilibrium point is located at the point where the supply curve and the demand curve intersect. A market is said to be in when the quantity supplied does not equal the quantity demanded at a certain price. When quantity demanded is more than the quantity supplied, there is. A price lower than the equilibrium price will encourage buyers and discourage sellers. Prices will rise because sellers hope to increase their profits. When quantity supplied is more than quantity demanded, there is. Prices will fall because sellers need to sell their supply. Whenever there is excess in supply or demand, market forces work to create equilibrium. Sometimes governments attempt to control prices in a market. Governments may set a, a maximum price that can be charged. For example, some cities have price ceilings on rental apartments, If the price ceiling is lower than the equilibrium price, there will be an excess of. Fewer apartments are offered than people want to rent. Governments may also set a, a lowest price that can be paid. An example is the, the lowest hourly rate a business can pay workers. When a minimum wage is set higher than the equilibrium rate, there is excess of labor. Markets are in equilibrium when the amount demanded is equal to the amount supplied. COMPLETE THE FOLLOWING MARKET EQUILIBRIUIM CURVE.

3 In the Case of the Pizzerias Supply the requested information in the spaces provided. 1. The market equilibrium price: 2. The market supply level: 3. The market demand level: In Any Market Environment 4. How equilibrium is shown in a supply and demand graph: 5. Two possible outcomes of disequilibrium: 6. Supplier price response to excess demand: 7. Condition under which market forces will push market toward the equilibrium: In the Case of Government Intervention 8. The purpose(s) of rent control: 9. Negative results of ending rent control: 10. Effect on labor when minimum wage exceeds equilibrium: 11. Purpose of Northeast Dairy Compact:

4 Price Chapter 6: Combining Supply and Demand 6-2 Summary: Fill in the missing words. The previous section described disequilibrium that occurs along a demand or supply curve. If a price is higher or lower than equilibrium price, market forces push prices back toward equilibrium. Sometimes, however, changes in market conditions lead to the shift of an entire demand curve or supply curve. This means that the quantity demanded or supplied is now different at all price levels. These changes also push a market into, and market forces tend to bring it back to. Technology, for example, can make a good cheaper to produce. The earliest CD players cost about \$1,000. As technology improved prices. The supply curve shifted to the as supply increased. Producers were now willing to offer greater quantities of CD players at all prices. However, quantity supplied was now greater than quantity demanded. Another word for this situation is. Producers reacted to the surplus by lowering prices, and eventually price and quantity reached a new equilibrium. An outward shift in demand can be caused by a fad, such as the surge in popularity of a new toy. Buyers want more toys than are supplied, and a occurs. A shortage is when quantity demanded is than quantity supplied. During a shortage, producers and stores tend to raise prices. The market price will until the quantity supplied equals the quantity demanded, and a new equilibrium is established. When supply or demand shifts, market price and quantity sold move toward a new equilibrium. COMPLETE THE FOLLOWING SHIFT IN THE SUPPLY OF CD PLAYERS BECAUSE OF TECHNOLOGICAL IMPROVEMENETS. a S 1 D 1 Output

5 Complete the chart by supplying an effect for each cause. Cause 1. Entire supply curve shifts. 1. Effect 2. Technology for making compact discs players improves. 3. After a drop in production cost, CD player suppliers become willing to offer 1,200,000 units at the original price, but demand remains at 1,000, Price of CD players continues to fall Production cost of CD players continues to fall Market s supply curve shifts to the left. 6. In the market: On the equilibrium point: 7. Demand Curve of a good suddenly shifts right Signs of excess demand for the good continue over time. 8. On suppliers: 9. Demand for a good falls. 9. On the demand curve:

6 6-3 Summary: Fill in the missing words. Prices are like signals that send information to buyers and sellers. For producers, a price is a signal to increase. A price is a signal to reduce the or leave the market. For buyers, a low price is a signal to, and a high price is a signal to think before buying. Another advantage of prices is that they are. Prices can usually change more quickly than production levels. A occurs when there is a sudden shortage of a good, such as wheat or gasoline. Because supply usually cannot be increased quickly, increasing prices helps resolve excess demand. is a system for allocating goods and services using tools other than price. Centrally planned economies use rationing, not price, to distribute goods and services. Rationing is expensive to administer. It tends to lead to only a few products, rather than the wide variety we enjoy in our price-based system. Prices do not always work efficiently in market in which there is not much, or in which buyers and sellers do not have enough information. Another problem is, such as air and water pollution, that spill over onto other people who have no control over how much of a good is produced. Producers do not usually pay spillover costs, and the extra cost will be paid by the. Price acts as a signal for both producers and consumers. FROM YOUR TEXTBOOK, COMPLETE THE CHART TO SHOW PRICE AS A SIGNAL. Producers Consumers High Price Green Light Green Light Low Price Red Light Red Light

7 Answer the following questions on the lines provided. 1. What overall, vital role do prices play in the free market? 2. What standards do prices set? 3. What signals do high prices send to producers and consumers? 4. Why do suppliers use price rather than production to resolve the problem of excess demand? 5. What drives the distribution system in the free market? 6. How does a price-driven economy allow for a wide diversity of goods? 7. What was the goal of the Soviet planned economy? 8. How did the Soviet economic system affect consumer goods? 9. How does the free market ensure an efficient allocation of resources? 10. What motivates suppliers to increase production in the face of high demand and high prices? 11. What three problems in the free market work against the efficient allocation of resources?

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