Price Chapter 6 sections 2 and 3

Prices Prices are signals that convey information to buyers and sellers in the market: A high price is a signal for producers to produce more and consumers to buy less. A low price is a signal for producers to produce less and consumers to buy more.

Prices favor neither the producer nor the consumer. Prices are Neutral Prices favor neither the producer nor the consumer. They are the result of competition between buyers and sellers

Buyers and Sellers have the exact opposite intentions. In a Market…. Buyers and Sellers have the exact opposite intentions. Therefore, adjustments in prices are necessary to reach a compromise…..

Market/EQUILIBRIUM price The equilibrium price is where the quantity of goods/services supplied is equal to the quantity demanded S=D When the market is not balanced, in other words, not in equilibrium, a surplus or shortage can occur: Surplus: when the supply is greater than the demand S>D Shortage: when the supply is less than the demand S<D When the market finds it s equilibrium price, the market is “cleared.” In other words, at the end of the trading day, there isn’t a surplus or a shortage.

Equilibrium

Theory of Competitive Pricing The Theory of Competitive Pricing can be seen through economic models using supply and demand schedules and graphs Price Fixing Price Ceilings Price Floors

Government policies that fix prices, instead of the competitive market Price Fixing Government policies that fix prices, instead of the competitive market

Price Ceilings The maximum price that can be charged Rent control Result is a shortage

The lowest price that can be paid for a good or service Price Floors The lowest price that can be paid for a good or service Minimum wage Result is a surplus