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ECON CH 6-1 COMBINE SUPPLY & DEMAND

 
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 1. 

Study the introduction above. Explain what you expect to learn in this lesson. Pay close attention to the vocabulary words as you will be tested on them later on.
 
 
The market system makes certain that
consumers can buy the products they
want, that sellers make enough profit to
stay in business, and that sellers respond to
changing needs and tastes of consumers.
Other economic systems have been tried —
most notably, central planning —and have
been judged by most observers to be less
successful than the market system.

In this section we will combine our tools
for studying demand and supply to learn
how markets operate and how markets can
turn competing interests into a positive
outcome for both sides. In the process we
will discover that free markets usually
produce some of their best outcomes when
they are left alone, without government
intervention.

Balancing the Market

Just as buyers and sellers come together in a
market, the study of demand and supply
will come together in this section.We begin
by looking at the supply and demand schedules.

As you will recall, a demand schedule
shows how much consumers are willing to
buy at various prices. A supply schedule
shows how much sellers are willing to sell
at various prices. Comparing these schedules should allow us to find common
ground for the two sides of the market.

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The combined supply and demand
schedule in Figure 6.1 combines the market
demand and supply schedules for pizza
slices that you saw in Chapters 4 and 5. For
each price, this schedule lists both the
number of slices that consumers are willing
to buy and the number of slices that pizzerias
are willing to supply.
 

 2. 

Which economic system responds best to the needs of consumers and businesses?
a.
central planning system
c.
Communism
b.
market system
d.
Socialism
 

 3. 

Market systems usually operate best when
a.
they are given direction by the central government
c.
they are left alone, free of government interference
b.
they are controlled by central planners
d.
they are controlled by business
 

 4. 

What does a demand schedule show?
a.
how much consumers are willing to sell at various prices
c.
how much consumers are willing to
buy at various prices
b.
how much suppliers are willing to produce at various prices
d.
consumption demands made by the central government planners
 

 5. 

What does a supply schedule show?
a.
how much sellers are willing to sell
at various prices.
c.
how much buyers are willing to purchase at various prices
b.
how much sellers are willing to purchase at various prices
d.
that there is little or no difference between supply and demand
 

 6. 

What does the Supply and Demand schedule above show?
a.
the number of slices that consumers are willing to buy and the number of slices that pizzerias are willing to supply at different production costs
c.
demand is the same at each price
b.
there is little difference between supply and demand
d.
the number of slices that consumers are willing to buy and the number of slices that pizzerias are willing to supply at each price.
 
 
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Defining Equilibrium

The point where demand and supply come
together at the same number of slices is
called the equilibrium. Equilibrium is the
point of balance between price and
quantity. At equilibrium, the market for a
good is stable.

To find the equilibrium price and equilibrium
quantity, simply look for the price
at which the quantity supplied equals the
quantity demanded. Do you see that in
Figure 6.1 this occurs at a price of $1.50
per slice? At that price, and only at that
price, the quantity demanded and the
quantity supplied are equal, at 200 slices
per day. This is the market equilibrium.

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In the market for pizza, as in any
market, quantities supplied and demanded
will be equal at only one price and one
quantity. At this equilibrium price, buyers
will purchase exactly as much of the
product as firms are willing to sell. Buyers
who are willing to purchase the goods at
the equilibrium price will find ample
supplies on store shelves. Firms that are
willing to sell at the equilibrium price will
find enough buyers for their goods.

Graphing Equilibrium

We can also illustrate equilibrium with a
supply and demand graph. In Figure 6.1,
we have plotted on the same graph the
market supply curve and the market
demand curve for slices of pizza. The equilibrium price and quantity can be found
where quantity supplied equals quantity demanded, or the point where the supply
curve crosses the demand curve. On the
graph, this is point a.
 

 7. 

Where is equilibrium on the chart above?
a.
the point where supply is greater than demand
c.
the point where demand is greater than supply
b.
the point where supply and demand intersect
d.
the point where a slice of pizza costs $0.00
 

 8. 

What is the equilibrium price for a slice of pizza?
a.
$.50
c.
$1.50
b.
$1.00
d.
$2.00
 

 9. 

Assume you own the pizzaria illustrated in figure 6.1 At what price per slice of pizza will you loose the most money?
a.
$.50
c.
$3.00
b.
$1.50
d.
you will not loose money at any price
 

 10. 

The pizzaria will incur the greatest losses by having
a.
excess supply
c.
excess price
b.
excess demand
d.
equilibrium
 

 11. 

Market equilibrium will be found at the price at which the quantity demanded is equal to
the quantity  ____________ .
a.
priced
c.
demanded
b.
cost
d.
supplied.
 

 12. 

Which market curves are illustrated in the chart above? (pick 2)
 a.
cost
 c.
demand
 b.
supply
 d.
price
 
 

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Disequilibrium

If the market price or quantity supplied is anywhere but at the equilibrium, the market is in a state that economists call disequilibrium. Disequilibrium occurs when quantity supplied is not equal to quantity demanded in a market. In the example, disequilibrium will occur with any price other than $1.50 per slice or any quantity other than 200 slices. Disequilibrium can produce one of two outcomes, excess demand or excess supply.
 

 13. 

If the market price or quantity supplied is not at the equilibrium point, the market is in a state that economists call _____________.
a.
equilibrium
c.
disarray
b.
disequilibrium
d.
confusion
 

 14. 

If supply is 250 and price is $2.00, what market condition will exist?
a.
excess supply
c.
market equilibrium
b.
excess demand
d.
market balance
 

 15. 

If price per slice is $1.00 and demand is 250 slices, what market condition will exist?
a.
market balance
c.
excess supply
b.
market equilibrium
d.
excess demand
 

 16. 

If price is $1.50 and demand is 200 slices, what market condition will exist?
a.
equilibrium
c.
excess supply
b.
disequilibrium
d.
excess demand
 
 
Excess Demand

The problem of excess demand occurs when quantity demanded is more than quantity supplied. When the actual price in a market is below the equilibrium price, you have excess demand, because a low price encourages buyers and discourages sellers.

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For example, in Figure 6.1, a price of $1.00 per slice of pizza will lead to a quantity demanded of 250 slices per day and a quantity supplied of only 150 slices per day. At this price, there is excess demand of 100 slices per day.
 

 17. 

If Fillippi’s Pizza raises the price of a slice of pizza from $1.00 to $2.50, how many slices will it have to throw away each day?
a.
100
c.
50
b.
200
d.
will not have to throw any away
 

 18. 

What is the effect of excess demand? (pick 2)
 a.
more sellers
 c.
less sellers
 b.
more buyers
 d.
less buyers
 
 
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When customers want to buy 100 more slices of pizza than restaurants are prepared to sell, these customers will have to wait in long lines for their pizza, and some will have to do without. In Figure 6.2, above, we have illustrated the excess demand at $1.00 per slice by drawing a dotted line across the graph at that price. As you can see, at $1.00 a slice, the quantity demanded is 250 slices, and the quantity supplied is 150 slices.

If you were running the pizzeria, and you noticed long lines of customers waiting to buy your pizza at $1.00 per slice, what would you do? Assuming that you like to earn profits, you would probably raise the price. As you increased the price of pizza, you would be willing to work harder and bake more, because you would know you could earn more money for each slice you sell.

Of course, as the price rises, customers will buy less pizza, since it is becoming relatively more expensive. When the price reaches $1.50 per slice, you will find that you are earning more profits and can keep up with demand, but the lines are much shorter. Some days you may throw out a few leftover slices, and other days you have to throw an extra pizza or two in the oven to keep up with customers, but on the whole, you are meeting the needs of your customers. In other words, the market is now at equilibrium.

As long as there is excess demand, and
the quantity demanded exceeds the quantity
supplied, suppliers will keep raising the
price. When the price has risen enough to
close the gap, suppliers will have found the highest price that the market will bear.
They will continue to sell at that price until
one of the factors described in Chapter 4 or
5 changes the demand or supply curve and
creates new pressures to raise or lower
prices, and eventually, a new equilibrium.
 

 19. 

When customers have to wait in long lines to purchase a slice of pizza, it illustrates that a state of __________ exists
a.
equilibrium
c.
excess demand
b.
profitability
d.
excess supply
 

 20. 

What would motivate a pizza store owner to raise prices?
a.
excess supply
c.
equilibrium between supply and demand
b.
excess demand
d.
state of anarchy
 

 21. 

As a store owner raises the price of a slice of pizza, what will be the likely effect?
a.
more supply and demand
c.
more supply and less demand
b.
less supply and demand
d.
more demand and less supply
 

 22. 

A store owner who is selling pizza slices for $.50 a slice will likely have to _____ prices to reach equilibrium.
a.
lower
c.
continue the same
b.
raise
d.
disequilibrium
 
 
Excess Supply

If the price is too high, then the market
will face a problem of excess supply.
Excess supply occurs when quantity
supplied exceeds quantity demanded. For
example, at a price of $2.00 per slice of
pizza, the quantity supplied of 250 slices
per day is much greater than the quantity
demanded of 150 slices per day. This
means that pizzeria owners will be making
100 more slices of pizza each day than
they can sell at that price. The relatively
high price encourages pizzeria owners to
work hard and bake lots of pizza, but it
discourages customers from buying pizza,
since it is relatively more expensive than other menu items. Some customers will
buy one slice instead of two, while others
will eat elsewhere. The problem is shown
graphically in Figure 6.2. At the end of the
day, it is likely that 100 slices will have to
be thrown out.

After a short time, pizzeria owners will
get tired of throwing out unsold pizza at
closing time and will cut their prices. As the
price falls, the quantity demanded will rise,
and more customers will buy more pizza.
At the same time, pizzeria owners will
prepare fewer pizzas. As the price of pizza
falls, the quantity demanded rises and the
quantity supplied falls. This process will
continue until the price reaches $1.50 per
slice. At that price, the amount of pizza
that pizzeria owners are willing to sell is
exactly equal to the amount that their
customers are willing to buy.

Whenever the market is in disequilibrium
and prices are flexible, market forces will
push the market toward the equilibrium.
Sellers do not like to waste their resources on
excess supply, particularly when the goods
cannot be stored for long, like pizza. And
when there is excess demand, profit-seeking
sellers realize that they can raise prices to
earn more profits. In this way, market prices
move toward the equilibrium level.
 

 23. 

In which type of economy are you most likely to reach a state of equilibrium between supply and demand?
a.
socialist economy where pizza is free and prices are fixed
c.
centrally planned economy with fixed prices
b.
free market with flexible prices
d.
communist economy with little or no supply
 

 24. 

Markets tend to move toward
a.
excess supply
c.
equilibrium
b.
excess demand
d.
disequilibrium
 
 
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Government Intervention
Markets tend toward equilibrium, but in
some cases the government steps in to control prices. The government can impose a price ceiling, or a maximum price that can be legally charged for a good. In other cases, the government can create a price floor, or a minimum price for a good or service.

Price Ceilin
gs
A price ceiling is a maximum price, set by law, that sellers can charge for a good or service. The government places price ceilings on some goods that are considered “essential” and might become too expensive for some consumers. For example, some local governments, notably New York City, have experimented with ceilings on apartment rents, called rent control. Rent control was introduced to prevent inflation during a housing crisis in the early 1940s and continued after World War II. More recently, other cities imposed rent control, often motivated by a desire to help poor households by cutting their housing costs and permitting them to live in neighborhoods they could otherwise not afford. As we’ll see, rent control reduces the quantity and quality of housing, so it helps some households but harms others, including many poor households. If the ceiling is established below the equilibrium price, the result will look like graph A in Figure 6.3 above.
In this market, the supply and demand curves for two-bedroom apartments meet at the equilibrium shown at point c in graph B. At this point, rents are $900 a month. Consumers will demand 30,000 apartments and suppliers will offer 30,000 apartments for rent.

Suppose that the city government passes a law that limits the rent on two-bedroom apartments to $600 per month. At that price, the quantity of apartments demanded is 40,000 (point b), and the quantity supplied is 20,000 (point a). At such a low price, apartments seem inexpensive, and many people will try to rent apartments instead of living with their families or investing in their own houses.

However, some landlords will have difficulty earning profits or breaking even at these low rents. Fewer new apartment buildings will be built, and older ones might be converted into offices, stores, or condominiums.

As you can see in graph A of Figure 6.3, the result is excess demand of 20,000 apartments. The price ceiling increases the quantity demanded but decreases the quantity supplied. Since rents are not allowed to rise, this excess demand will last as long as the price ceiling holds.
 

 25. 

If the government imposes rent control on apartments, what will be the effect?
a.
more apartments will be available
c.
apartments will be more expensive
b.
fewer apartments will be available
d.
people will invest more time and effort taking care of their apartments
 

 26. 

Without rent control (pick 3)
 a.
demand for apartments fall
 c.
the market is in disequilibrium
 b.
supply for apartments increase
 d.
the market is in equilibrium
 

 27. 

With rent control (pick 3)
 a.
demand for apartments increases
 c.
the market is in disequilibrium
 b.
supply of apartments decreases
 d.
the market is in equilibrium
 
 
The Cost of Price Ceilings
When the price cannot rise to the equilibrium
level, the market must determine
which 20,000 of the 40,000 households
will get an apartment, and which 20,000
will do without. Although governments
usually pass rent control laws to help
renters with the greatest need, few of these
renters benefit from rent control. Methods
besides prices, including long waiting lists,
discrimination by landlords, and even
bribery, are used to allocate the scarce
supply of apartments among the many
people who want them. Luck becomes an
important factor, and sometimes the only
way to get a rent-controlled apartment is to
inherit it from a parent or grandparent.

New York City revised its laws in the
1990s to exclude the wealthiest renters from rent control protection after newspapers
discovered that some very wealthy
people rented spacious apartments at prices
much less than market value.

Additionally, since the rent controls limit
landlords’ profits, landlords may try to
increase their income by cutting costs. Why
should a landlord give a building a fresh
coat of paint and a new garden if he or she
can’t earn the money back through higher
rent? Besides, if there’s a waiting list to get
an apartment, the landlord has no incentive
to work hard and attract renters. As a result,
many rent-controlled apartment buildings
become run-down, and renters may have to
wait months to have routine problems fixed.  
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 28. 

Which group of people would most likely be against rent controls
a.
free market capitalists
c.
central planning advocates
b.
socialists
d.
communists
 

 29. 

What does the cartoon above mean?
a.
Rent control prevents construction companies from destroying housing
c.
Rent control encourages the construction of new housing
b.
Construction companies are bad for the economy
d.
Rent control inhibits the construction of new housing
 
 
Ending Rent Control

If rents were allowed to rise to the market  equilibrium level, which is $900 per month, the quantity of apartments in the market would actually rise to 30,000 apartments. The market would be in equilibrium, and people who could afford $900 a month would have an easier time finding vacant apartments. Instead of spending time and money searching for apartments, and then having to accept an apartment in a poorly maintained building, many renters would be able to find a wider selection of apartments. Landlords would also have a greater incentive to properly maintain their buildings and invest in new construction.

On the other hand, people lucky enough to live in a rent-controlled apartment may no longer be able to afford to stay there once rent control is ended and the landlord can legally raise the rent. As soon as the neighborhood improves, these renters may be priced out of their own apartments, to be replaced by people willing to pay the equilibrium price. Remember that ending rent control increases the number of apartments on the market by 10,000.

Certainly, the end of rent control benefits
some people and hurts others. Economists
agree that the benefits of ending rent
control exceed the costs, and suggest that
there are better ways to help poor households
find affordable housing.
 

 30. 

Ending rent control would result in
a.
more available apartments
c.
market disequelibrium
b.
fewer available apartments
d.
cheaper apartments
 

 31. 

If you were living in a rent control apartment and rent control was suddenly ended, the result would most likely be
a.
less demand for your apartment and a decrease in the rent you are paying
c.
market disequilibrium
b.
greater demand for your apartment and an increase in the rent you are paying
d.
more run-down neighborhoods
 
 
a.
equilibrium
e.
disequilibrium
b.
rent control
f.
minimum wage
c.
excess supply
g.
excess demand
d.
price ceiling
h.
price floor
 

 32. 

when quantity supplied is more than quantity demanded
 

 33. 

the point at which quantity demanded and quantity supplied are equal
 

 34. 

when quantity demanded is more than quantity supplied
 

 35. 

a maximum price that can be legally charged for a good or service
 

 36. 

describes any price or quantity not at equilibrium; when quantity supplied is not equal to quantity demanded in a market
 

 37. 

a price ceiling placed on rent
 

 38. 

a minimum price for a good or service
 

 39. 

a minimum price that an employer can pay a worker for an hour of labor.
 



 
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