Chapter 6.3 Notes The Price System

The Language Of Price A system that is a form of communication between producers and consumers. If the consumer wants to buy somewhere else because the price if too high, then the producer must decide if he/she must lower the price. If consumers are consuming, producers may try and increase their profits by raising the prices.

Benefits to the Price System Information – Both producers and consumers need to gather information. Incentives – encourages producers and consumers to behave in a certain way Flexibility – the supply and demand of goods of a product change constantly – natural disasters, floods, work stoppages- Choice – By encouraging participation in the markets, the price system increases choices in those markets Efficiency - provides for the wise use of resources– key benefit of the price system -

Limitations of the Price System Market Failures – the price system fails to account for the costs Externalities – the production of goods sometimes result in side effects for people not directly connected to the production or consumption Positive externality – restaurant near a factory Negative externality – air pollution

Limitation continued Public goods – the price system fails to assign the costs of public goods A public good is any good or service that is consumed by all members of a group National defense is a good example because maybe you are a pacifist!

Chapter 5 sec.2 Determining Prices

Market Equilibrium The price system helps producers and consumers reach market equilibrium – A situation that occurs when the quantity supplied and the quantity demanded for a product are equal at the same price. M.E. P Q D S

How does the Price System steer producers and consumers toward the Equilibrium Point? As producers change prices and the quantity of goods supplied, this adjustment period works to eliminate surpluses and shortages In turn, the producers will find an equilibrium point where there are limited shortages and surpluses

Surplus Exists when the quantity supplied exceeds the quantity demanded How do you graph it? P Q S D Surplus S>D 100>

Shortage Exists when the quantity demanded exceeds the quantity supplied How do you graph it? P Q S D Shortage S<D 20<

Price Floor Government regulation establishing a minimum price that a price can not go below! Price Floor exist when there is a surplus! Often times in the agricultural industry Graph it!

Q P S D Price Floor 5.00$ & surplus Prices can not go below the Price floor

Price Ceiling Government regulation establishing a maximum price that a price can not go above! Price Ceilings exist when there is a Shortage! To protect consumers from price gauging. Graph it!

P Q S D Price Ceiling and Shortage 3.00$ Prices can not above this point!