Prices CHAPTER 5 SECTION 1: The Price System Holt Economics 4/1/2017 CHAPTER 5 Prices SECTION 1: The Price System SECTION 2: Determining Prices SECTION 3: Managing Prices Chapter 5

Prices Pr ice Quantity SECTION 1: The Price System 3.00 2.00 1.00 Pr ice Prices SECTION 1: The Price System SECTION 2: Determining Prices SECTION 3: Managing Prices D 2000 4000 6000 8000 10000 12000 14000 Quantity

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.

Role of the price system: SECTION 1 The Price System Role of the price system: to tell consumers how much it costs to produce or distribute a good or service to tell producers how much consumers are willing and able to pay for a product

Benefits of the price system: SECTION 1 The Price System Benefits of the price system: provides information provides incentives provides choice provides efficiency provides flexibility

Limitations of the price system: SECTION 1 The Price System Limitations of the price system: does not account for all production costs and benefits Negative externalities Positive Externalities Public Goods can be unstable

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?

Draw what would happen if the price is above equilibrium. Draw what would happen if the price is below equilibrium. E E Indicate what happens to supply and demand in relation to the equilibrium point. Indicate what happens to supply and demand in relation to the equilibrium point. Shortage or Surplus? Shortage or Surplus? Draw what would happen to the equilibrium point if the overall supply for the product decreased. Draw what would happen to the equilibrium point if the overall demand for the product increased.

Price per Cheeseburger Use the chart below to create an equilibrium chart in the space to the right. (Figure 5.1 in the text) Price per Cheeseburger Quantity Demanded Quantity Supplied $1.00 600 $1.50 500 100 $2.00 400 200 $2.50 300 $3.00 $3.50 $4.00 At what price per cheeseburger is market equilibrium reached? ________ In the above example, what would be the consequence of charging $3.50 per burger? Show on the chart. What if the vendor charged only $1.50 per burger? Show on the chart. You know from earlier chapters that there are factors that can cause demand or supply to shift. These factors include: Determinants of demand = consumer tastes, market size, income, prices of related goods, and consumer expectations Determinants of supply = government actions, technology, competition, producer expectations, prices of resources and related goods

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?