1. Chapter Price 6

2. Objectives: Students will learn… How the market establishes an equilibrium price How the equilibrium price balances supply & demand How supply & demand models can be used to determine the equilibrium price of a good or service. Common ways in which governments may change free market pricing and some of the policy reasons for intervention.

3. What factors do you consider when deciding whether to purchase an item? Price is probably one of the factors you think about. Low prices may attract buyers, but they also impact sellers. In a market economy, prices are determined by supply and demand. PRICE

4. Signals: Economic Indicators Prices are signals! Price up increase production

5. Market Forces Shortage quantity demanded is greater than quantity supplied Rationing limiting demand results in rising prices Surplus quantity supplied is greater than quantity demanded. Equilibrium price equal supply and demand (the price that clears the market)

6. Quantity Supplied Factors Price of Products Price of related goods Number of suppliers in the Market

7. No Surplus No Shortage Most efficient method to allocate resources

8. What will happen to the equilibrium price if the demand for CDs suddenly increases?

9. But in reality CD demand has decreased Therefore if the supply remains the same the price has to decrease

10. Black Market A market where regulations and laws are not practiced when there are exchanges of goods and services.

12. Government Intervention Price Floors & Price Ceilings are Price Controls, examples of government intervention in the free market which changes the market equilibrium. They each have reasons for using them, Equity, but there are Efficiency losses with both.

13. Price ceilings usually protect buyers Price floors usually protect sellers