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Price: Interaction of supply Demand Objective:Explain the concept of equilibrium.Explain the effect of changes in demand and supply upon the equilibrium.Explain the concepts of excess demand and supply upon equilibrium.Explain, distinguish between, and give examples of, maximum and minimum price controls.Discuss the consequences of price controls.Surplus and Shortage-------DisquillibriumCloser Look at the SupplierMarginal Product of Labor Marginal ReturnsMarginal Cost CurveKey wordsEquilibriumDisequilibriumShortageSurplusPrice maximum (price ceiling)Price minimum (price floor)Rent controlMinimum wageEssential Facts_ EQUILIBRIUMBuyers and sellers come together to interact in a market.The point where demand and supply meet is equilibriumEquilibriumPoint of Maximum benefit Point of Market ClearanceBoth buyers and sellers benefitBuyers purchase exactly as much of a good as firms are willing to sell.How does this cartoon show the relationship of supply and demand?What will happen to the market if supply becomes stronger than demand?Essential Facts_ DisequilibriumMarket prices are not always where they should be at equilibrium.Disequilibrium occurs when market demand is not equal to market supply.Model Work Time (TB 40)From Shortage to EquilibriumFrom Surplus to EquilibriumGlossary of FormulasLinear Demand FunctionQd=a-bPQd : Quantity demandeda : Q-interceptb : slope=changing QD/changing PP : priceYou don’t have the demand schedule.EX/Qd=14-2P14:Q-intercept-2:slopePQd0141122103846546270Qd=14-2(0)=14Qd=14-2(1)=12Qd=14-2(2)=10Qd=14-2(3)=8Qd=14-2(4)=6…Supply FunctionQs=c+dPQs:Quantity SupplyC:Q-interceptD:slope(changing Qs/Changing S)P:priceEX/Qs=2+2P0=2+2PP=-1PQdQs-1001421124210638846105412621470162014.11.17More about PriceThe role of Price MarketEfficiencyPrice System:-Flexible-Efficient Resource Allocation-Competition could result in better products-Provides signals-Price can be used to gage demand supply-Provides Incentive-Common languageKey words:-Product Market-Res