If a business has many extra units of a product not being sold—how does this affect price? Chapter 6 Section 2

Price Adjustment Process We use the economic model to analyze behavior and make predictions We use the economic model to analyze behavior and make predictions Figure 6.1 on pg. 143 Figure 6.1 on pg. 143 Shows supply and demand Shows supply and demand Adjustment process moves toward market equilibrium Adjustment process moves toward market equilibrium Prices are relatively stable and quantity of goods or services is equal to the quantity demanded Prices are relatively stable and quantity of goods or services is equal to the quantity demanded

Surplus and Shortage (Figure 6.2 on pg. 145) Surplus and Shortage (Figure 6.2 on pg. 145) Surplus—situation in which the quantity supplied is greater than the quantity demanded at a price Surplus—situation in which the quantity supplied is greater than the quantity demanded at a price Shortage—situation in which quantity demanded is greater than the quantity supplied at a price Shortage—situation in which quantity demanded is greater than the quantity supplied at a price Equilibrium price—the price that “clears the market” by leaving neither a surplus nor a shortage Equilibrium price—the price that “clears the market” by leaving neither a surplus nor a shortage

Explaining and Predicting Price Changes in Supply Changes in Supply Prices shift due to changes in supply Prices shift due to changes in supply Farmers are example because price of crops depends on supply (depends on the weather) Farmers are example because price of crops depends on supply (depends on the weather) Figure 6.3 on pg. 146 Figure 6.3 on pg. 146 Elasticity Elasticity Changes in price are much smaller if demand/supply is elastic Changes in price are much smaller if demand/supply is elastic

Changes in Demand Changes in Demand Prices shift due to changes in demand Prices shift due to changes in demand Figure 6.4 on pg. 147 Figure 6.4 on pg. 147 Competitive Price Theory Competitive Price Theory Prices of some foods and other items will be generally similar from one store to the next Prices of some foods and other items will be generally similar from one store to the next When prices are different—it may be because of advertising or buyers are not informed When prices are different—it may be because of advertising or buyers are not informed Example: Gas prices are usually higher near the expressway because travelers do not know the location of lower cost stations in unfamiliar areas Example: Gas prices are usually higher near the expressway because travelers do not know the location of lower cost stations in unfamiliar areas