Combining Supply and

Demand
6.1
 Two Powerful Laws
 Law of Demand: As Price goes
up people want less
 Explains wide variety: why

downtown buildings are taller,

why people will sit in the
upper deck of a stadium
 Two Powerful Laws
 Law of Supply: The higher the price
of a good, the greater the quantity
suppliers will produce
 Explains why parking places at the

beach are more expensive in the

summer months, why people are
paid overtime at a premium wage
 Equilibrium
 The point where demand and
supply curves intersect
 This is where both producers and
consumers are satisfied
 Quantity demanded equals quantity
supplied
 Only happens at one point
 Disequilibrium
 If the price is anywhere but
equilibrium, quantity supplied
does not equal quantity
demanded
 Leads to excess supply or excess
demand
 Excess Demand
 When the quantity demanded is
greater than the quantity supplied
 Price is below market equilibrium
 Low price encourages buyers but
not sellers
 When there is excess demand
suppliers will raise their price
 Excess Supplied
 When quantity supplied exceeds
quantity demanded
 High price encourages sellers but
not consumers
 Price is above equilibrium
 Suppliers will lower prices to sell
excess supply
 Effects of Excess
 When the market is in disequilibrium and
prices are able to change, the market
will naturally correct itself
 Suppliers may get tired of throwing

away extra product if there is excess

supply
 Suppliers may raises prices to

increase profit when there is excess

demand
Government Intervention
 Price Ceilings
 A maximum price that can be charged for
a good
 Set by law on goods considered essential
and might become to expensive
 Rent control is the most famous

example
 Symbolized on a curve by drawing a
straight line across at the price ceiling
 Price Ceilings
 Reduce quantity supplied and the
price charged
 Means lower total revenue

 Lower revenue means no

incentives to improve the product

 Excess demand is created
 Consequences of a Price
Ceiling
Excess demand means some
non-price factor will develop to
determine who gets and who
does not
 Wait list, discrimination,

bribery, luck
 Price Floors
A minimum price that must be
paid for a good or service
Governments wants sellers to
receive some reward for their
efforts
 Minimum Wage
Most well known price floor
Employers must pay at least a
certain rate per hour
 Minimum Wage
 If set above market equilibrium it
will decrease the quantity of labor
supplied
 Results in excess supply =

more people looking for work at

the wage than employers will
hire