The Price System at Work
1-What are economic models used for?
• To analyze behavior and predict outcomes
2-What is the equilibrium price?
• When the supply and demand curves
intersect:
 the price at which the number of unites
produced equals the number of units
sold.
• There is neither a surplus nor a shortage of
the product in the market.
https://www.youtube.com/watch?v=7eZcPs
9z9OA
3-What is a surplus?
• When the quantity
supplied is larger
than the quantity
demanded, the
difference between
them is called
excess supply.
• This creates a
SURPLUS.
4-What can we assume about price based on
the size of a surplus?
• It will go down.
5-What is a Shortage?
• When the quantity
demanded is larger than
the quantity supplied,
the difference between
them is called excess
demand.
• This creates a
SHORTAGE.
6-What will happen to the price and quantity supplied
in the next trading period as a result of a shortage?
• Both will go up.
7-What tends to happen to the market once the
equilibrium price has been reached?
• The market clears, by leaving neither a
shortage nor a surplus
PRICE CEILINGS
• A price ceiling is a government- imposed limit on
the highest price firms can charge in a market. A
price ceiling will cause a SHORTAGE.
https://www.youtube.com/watch?v=R0h8kfA4i_A&index=9&list=PL-JlTsnpBVIESkJLqQ_SPfuQ_rIh3ttDR
PRICE FLOORS
•
•
•
A price floor is a government- imposed limit below which
prices cannot fall. Price floors tend to cause a SURPLUS.
It is the lowest legal price that can be paid for a good/service
Example- milk, minimum wage