1. Prices and Decision Making
Chapter 6
Prices and Decision Making

2. 6.2: The Price System at Work
Understand how prices are determined in competitive markets.
Explain how economic models can be used to predict and explain price changes.
Apply the concepts of elasticity to changes in prices.

3. Vocab Economic model Market equilibrium Surplus Shortage
Equilibrium price

4. Intro
In a competitive market economy, everyone who participates has a hand in determining the price
Part of why prices are seen as neutral and impartial

5. Buyers and sellers have the exact opposite hopes and desires.
Buyers-low prices
Sellers-high prices
Neither can get exactly what they want
Adjustments must be made to compromise

6. The Price Adjustment Process
Demand and Supply create a complete picture of the market
Price adjustments help a competitive market reach market equilibrium
Fairly equal supply and demand

8. Surpluses occur when supply exceeds demand

9. Shortages occur when demand exceeds supply

10. Equilibrium price is the price at which supply meets demand

11. Explaining and Predicting Prices
A change in price is normally the result of a change in supply, demand, or both

12. The smallest of changes in supply can create big price changes

13. Elastic supply and demand help keep prices from changing dramatically

14. The Competitive Price Theory
The theory of competitive pricing represents a set of ideal conditions and outcomes
Serves as a model to measure market performances
In theory, a competitive market allocates resources efficiently
To be cometitive, sellers are forced to lower prices
Makes them find ways to keep costs down
Competition among buyers keeps prices from dropping too low