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Section 1 Combining Supply and Demand

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Objectives

After studying this section you will be able to:

1. Explain how supply and demand create balance in the marketplace.
2. Compare a market in equilibrium with a market in disequilibrium.
3. Identify how the government sometimes intervenes in markets to control prices.
4. Analyze the effects of price ceilings and price floors.

Section Focus

In an uncontrolled market, the price of a good and quantity sold will settle at a point where the quantity supplied equals the quantity demanded. The government can set a maximum or minimum price, but that can lead to an imbalance between supply and demand.

Key Terms

• equilibrium
• disequilibrium
• excess demand
• excess supply
• price ceiling
• price floor
• rent control
• minimum wage

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.

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.

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.

In the market equilibrium, prices adjust to make the quantity supplied equal to the quantity demanded.

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