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Chapter 6 notes – all sections

This chapter notes cover all sections on the price adjustment process and market equilibrium. Topics include surplus, shortage, supply equilibrium, demand equilibrium, price ceilings, price floors, and shifting curves with supply and demand.

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Chapter 6 notes – all sections

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  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 Figure 8 The Equilibrium of Supply and Demand 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 Figure 9 Markets Not in Equilibrium (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 Figure 9 Markets Not in Equilibrium (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 Floors • Lowest legal price that can be paid for something • Example – minimum wage • ABOVE EQUILIBRIUM • Causes a surplus

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

  9. 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

  10. 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

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