Chapter 6: Prices.

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Presentation transcript:

Chapter 6: Prices

Section 6.1

Prices Price Price helps determine the WHAT to produce Monetary value of a product Act as signals that tell people to buy more or less of a product, and producers to produce more or less of a product Price helps determine the WHAT to produce Producers will profit as long as the cost the item remains lower than the price to consumers Price system is more efficient when markets are competitive

Advantages of Price Prices are neutral Prices are flexible They don’t favor either side Prices are flexible They can adapt to change Prices are familiar Easy to understand Prices are efficient The market determines price without administration

Section 6.2

Buyers vs. Sellers When prices are too high When prices are too low A surplus will occur when QS is greater than QD at a given price Prices tend to decrease as a result of the surplus When prices are too low A shortage will occur when QD is greater than QS at a given price Prices will tend to increase as a result of the shortage

Equilibrium Equilibrium price Equilibrium quantity The point where QS = QD The point on a graph where price intersects with quantity The price that clears the market Equilibrium quantity Quantity supplied that is equal to the quantity demanded at the equilibrium price

How do changes in supply/demand affect prices? When demand increases, the price increases When demand decreases, the price decreases When supply increases, the price decreases When supply decreases, the price increases

Section 6.3

Price Controls Price ceilings Price floors The highest legal price that can be charged for a product Price floors The lowest legal price that be paid for a product

Price Controls Subsidy Target price Nonrecourse loan Government payment to encourage or protect a certain economic activity Target price Price floor for agricultural products set by the government to stabilize farm prices The government ensures farmers receive a target price for their goods by granting nonrecourse loans Nonrecourse loan Loan that carries neither a penalty nor further obligation to repay

FOUR ADVANTAGES OF PRICES NEUTRAL FLEXIBLE FAMILIAR EFFICIENT

Cause and effect of surplus and shortage  QS greater than QD Surplus Prices decrease QS less than QD Shortage Prices increase

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