Chapter 6: Price
Objectives Explain how prices act as signals. Describe the advantages of using prices as a way to allocate economic products Understand how prices are determined in a competitive market. Explain how economic models can be used to predict & explain price changes. Describe ways in which interfering with prices can distort the market.
price market equilibrium surplus shortage equilibrium price Ch 6 Key Terms price market equilibrium surplus shortage equilibrium price price ceiling price floor
What is price? The monetary value of a product as established by supply & demand High prices signal producers to produce more & buyers to buy less Low prices signal producers to produce less & buyers to buy more
Prices perform the allocating of goods & services function well because: They are neutral – do not favor buyer or seller They are flexible – can accommodate change They have no cost of administration – no outside interference, govt needed They are familiar & easily understood – quick decision-making
The Price System at Work To show the price adjustment process between buyers & sellers, supply & demand are graphed together The interaction of buyers & sellers results in a price agreeable to all
In a competitive market, adjustment process moves toward market equilibrium – a situation in which prices are relatively stable; quantity supplied is equal to quantity demanded
A surplus occurs when quantity supplied is greater than quantity demanded at a given price Price tends to go down as a result of surplus A shortage occurs when quantity demanded is greater than quantity supplied at a given price Price & quantity supplied typically rise as a result of a shortage
The equilibrium price is the price that “clears the market” by leaving neither a surplus nor a shortage at the end of the trading period The market tends to seek its own equilibrium
Distorting the Market Govt may set prices at socially desirable levels to achieve social goals Prices not allowed to adjust to their equilibrium levels Price ceiling: a maximum legal price that can be charged for a product (Ex. rent controls in NYC) Price floor: lowest legal price that can be paid for a good or service (Ex. minimum wage)