HOW PRICES ARE DETERMINED CHAPTER 5 HOW PRICES ARE DETERMINED

A. WHO SETS PRICES? 1. The consumer (the buyer) and the producer (the seller) agree on a price 2. The government does but it is rare in a “free market” economy 3. Businesses and buyers typically set prices

SUPPLY AND DEMAND on a Graph 1. Supply and Demand work in opposite directions 2. As prices get higher, businesses are willing to supply more (and vice-versa for demand and buying products) 3. Equilibrium - the point where buyers and consumers agree on a price 4. At Equilibrium  supply and demand intersect (cross) on the graph 5. Forces can change equilibrium  incomes, consumer tastes, technology, production costs, and resource availability

SUPPLY AND DEMAND GRAPH

C. Prices above Equilibrium 1. When prices are above what consumers will pay, there will be a surplus of goods and services 2. There will be a surplus of inventory Can you say “BIG SALE!!” Can you say “overstock.com”, T-J-Maxx? Ross? Marshalls?

D. Prices below Equilibrium 1. When prices go below what consumers expect, there will be a shortage of goods and services 2. The goods and services will be in high demand.

SHORTAGES