Prices and Decision Making Chapter 6 Prices and Decision Making

6.2: The Price System at Work Understand how prices are determined in competitive markets. Explain how economic models can be used to predict and explain price changes. Apply the concepts of elasticity to changes in prices.

Vocab Economic model Market equilibrium Surplus Shortage Equilibrium price

Intro In a competitive market economy, everyone who participates has a hand in determining the price Part of why prices are seen as neutral and impartial

Buyers and sellers have the exact opposite hopes and desires. Buyers-low prices Sellers-high prices Neither can get exactly what they want Adjustments must be made to compromise

The Price Adjustment Process Demand and Supply create a complete picture of the market Price adjustments help a competitive market reach market equilibrium Fairly equal supply and demand

Surpluses occur when supply exceeds demand

Shortages occur when demand exceeds supply

Equilibrium price is the price at which supply meets demand

Explaining and Predicting Prices A change in price is normally the result of a change in supply, demand, or both

The smallest of changes in supply can create big price changes

Elastic supply and demand help keep prices from changing dramatically

The Competitive Price Theory The theory of competitive pricing represents a set of ideal conditions and outcomes Serves as a model to measure market performances In theory, a competitive market allocates resources efficiently To be cometitive, sellers are forced to lower prices Makes them find ways to keep costs down Competition among buyers keeps prices from dropping too low