1. Chapter 6 notes – all sections

2. Price Adjustment Process • Market Equilibrium - a situation in which prices are relatively stable, and Qs = Qd (S and D cross) • Surplus – Qs > Qd; price tends to go down as a result • Shortage – Qd > Qs; results in the price and quantity supplied going up usually

3. Supply Equilibrium Equilibrium price $2.00 Demand Equilibrium quantity The Equilibrium of Supply and Demand – do not draw Price of Ice-Cream Cone 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of Ice-Cream Cones

4. Supply Surplus $2.50 2.00 Demand 4 7 10 Quantity Quantity demanded supplied Markets Not in Equilibrium – do not draw (a) Excess Supply Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones

5. Supply $2.00 1.50 Shortage Demand 4 7 10 Quantity Quantity supplied demanded Markets Not in Equilibrium – do not draw (b) Excess Demand Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones

6. Price Ceilings • Maximum legal price that can be charged for a product • Example: rent control • BELOW EQUILIBRIUM • Causes a shortage

7. Price Ceiling – do not draw

8. Price Floors • Lowest legal price that can be paid for something • Example – minimum wage • ABOVE EQUILIBRIUM • Causes a surplus

9. Price Floor – do not draw

10. Shifting Curves with S and D • When a S or D curve shifts it will change the Equilibrium Price and Quantity

11. 1. Hot weather increases the demand for ice cream . . . Supply New equilibrium $2.50 2.00 2. . . . resulting Initial in a higher equilibrium price . . . D D 7 10 3. . . . and a higher quantity sold. Figure 10 How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone Quantity of 0 Ice-Cream Cones

12. 1. An increase in the price of sugar reduces the supply of ice cream. . . S2 S1 New equilibrium $2.50 2.00 2. . . . resulting in a higher price of ice cream . . . Demand 4 7 3. . . . and a lower quantity sold. Figure 11 How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone Initial equilibrium Quantity of 0 Ice-Cream Cones