Prices CHAPTER 5 SECTION 1: The Price System Holt Economics 11/12/2018 CHAPTER 5 Prices SECTION 1: The Price System SECTION 2: Determining Prices SECTION 3: Managing Prices Chapter 5

Objectives: The Price System SECTION 1 What is the role of the price system? What are the benefits of the price system? What are the limitations of the price system?

What is the Price System? SECTION 1 The Price System What is the Price System? How Producers and Consumers communicate to determine prices.

Objectives: Determining Prices SECTION 2 What is market equilibrium? How does the price system handle product surpluses and shortages? How do shifts in demand and supply affect market equilibrium?

Market equilibrium is reached when the Qs = Qd SECTION 2 Determining Prices Market equilibrium is reached when the Qs = Qd Meaning the price when all goods produced are bought.

S 3.00 2.00 1.00 Pr ice Eq. D 2000 4000 6000 8000 10000 12000 14000 Quantity

What is a surplus? When there are more goods being made than being sold What does this mean? There are products just sitting on the shelf. If you are a producer are you happy about this? What might you do?

Pr ice Quantity Surplus S Eq. D Is there still a surplus? 2000 4000 6000 8000 10000 12000 14000 Is there still a surplus? What should be done to fix this? What happened to Price, Qs, and Qd? Quantity

How the price system handles product surpluses SECTION 2 Determining Prices How the price system handles product surpluses lowering product prices decreasing quantity supplied increasing quantity demanded

Pr ice Quantity S Eq. Shortage D What happened to Price, Qs, and Qd? 2000 4000 6000 8000 10000 12000 14000 What happened to Price, Qs, and Qd? Quantity

How the price system handles product shortages: SECTION 2 Determining Prices How the price system handles product shortages: increasing product prices increasing quantity supplied decreasing quantity demand

How shifts in demand and supply affect market equilibrium: SECTION 2 Determining Prices How shifts in demand and supply affect market equilibrium: Causes equilibrium to shift What is a determinant of Demand? What is a Determinant of Supply?

Pr ice Quantity Product: Potatoes S Surplus Eq 1 P1 Eq. 2 P2 D2 D1 Q1

If demand decreases what happens to: Qs? Equilibrium Price?

If demand increases what happens to: Qs? Equilibrium Price?

If supply increases what happens to: Qd? Equilibrium Price?

If supply decreases what happens to: Qd? Equilibrium Price?

Fill in the demand/supply schedule for a cup of coffee Fill in the demand/supply schedule for a cup of coffee. Use the data to create an equilibrium chart. Price per cup Quantity Demanded Quantity Supplied Choose a determinant of demand and draw a second demand curve that illustrates what would happen if a change in that determinant had an effect on demand. Determinant____________________________________ What happened to the equilibrium point? Now choose a determinant of supply and draw a second supply curve that illustrates what would happen if a change in that determinant had an effect on supply. Determinant ______________________________________________

In groups, you will draw an equilibrium graph showing: a. All Labels Directions: In groups, you will draw an equilibrium graph showing: a. All Labels b. What happens to the graph because of the headlines. Be sure to include: Increase or Decrease in Supply, Demand, Qs, and Qd. What happens to Equilibrium Tomorrow you will be presenting your graphs to the class explaining what is happening in the graph.

1. Product: Hot Dogs a. Actual ingredients in hot dogs released to public. Trust us, you don’t want to know!! b. Price of Hot Dog Buns Sky Rocket because Wheat Producers go on strike!!!! 2. Product: Hershey Chocolate a. Halloween is Next Week!!!! b. Hershey Bars: Part of a Healthy Diet! 3. Product: Headphones a. Apple to Raise Price on All iPods. b. Bose introduces headphones to Czech Republic for 1st time ever.

4. Product: Televisions a. New Television Producer Hopes to Make Splash With New Slim LCD T.V. b. Study Shows U.S. Citizens Making 25% Less Than 10 Years Ago. 5. Product: Bananas a. To Keep Costs low, the Government Will Give Subsidy to Banana Farmers Next Year b. Ice Cream over produced, Every Thursday for the next year is Free Ice Cream Day!!

Objectives: Managing Prices SECTION 3 Why do governments sometimes set prices? What do governments try to accomplish through price floors, price ceilings, and rationing? What happens when governments manage prices?

Reasons governments set prices: SECTION 3 Managing Prices Reasons governments set prices: to keep the market functioning smoothly to avoid instability caused by dramatic price swings

Tools the government uses to set prices: SECTION 3 Managing Prices Tools the government uses to set prices: price floors price ceilings rationing

Pr ice Quantity Price Floor Corn per pound S Pf Eq. D 5.00 4.00 3.00 2.00 1.00 Pr ice Pf Eq. D 2000 4000 6000 8000 10000 12000 14000 Quantity

Price Floors Set above Equilibrium Causes a Surplus Stops a products price from reaching Equilibrium, much like a floor stops us from touching the ground.

Price Ceilings Set below Equilibrium Causes a Shortage Stops a products price from reaching Equilibrium, much like a ceiling stops us from reaching the sky.

Pr ice Quantity Price Ceiling Gas Per Gallon S Eq. Pc D 5.00 4.00 3.00 2.00 1.00 Pr ice Eq. Pc D 2000 4000 6000 8000 10000 12000 14000 Quantity

Rationing The government determines how to distribute a good. Usually used during times of war to ensure the military receives necessary materials at a low price.-Little competition for the product.

Pr ice Quantity Rationing S2 S1 Eq.1 D1 5.00 4.00 3.00 2.00 1.00 2000 4000 6000 8000 10000 12000 14000 Quantity

What happens when governments manage prices: SECTION 3 Managing Prices What happens when governments manage prices: creates imbalances between supply and demand prevents markets from reaching equilibrium can create black markets

Wrap-Up CHAPTER 5 1. Describe the limitations of the price system. 2. Explain the role of the price system. Be sure to include how the price system encourages market equilibrium. 3. How can a shift in demand influence a market’s equilibrium point? 4. Why might a government establish a price floor on one good or service and a price ceiling on another? 5. Why might a government begin rationing items in the market?