1 SECTION 1: The Price System SECTION 2: Determining Prices SECTION 3: Managing Prices CHAPTER 5 Prices.

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Quantity

3.00

2.00

1.00

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Price

S

D

PricesPrices

SECTION 1: The Price System

SECTION 2: Determining Prices

SECTION 3: Managing Prices

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Objectives: Objectives: What is the role of the price system?What are the benefits of the price system?What are the limitations of the price system?

The Price SystemThe Price SystemSECTION 1

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What is the Price System? What is the Price System? How Producers and Consumers

communicate to determine prices.

The Price SystemThe Price SystemSECTION 1

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Objectives:Objectives:What is market equilibrium?How does the price system handle product

surpluses and shortages?How do shifts in demand and supply affect

market equilibrium?

Determining PricesDetermining PricesSECTION 2

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Market equilibriumMarket equilibrium is reached when is reached when the Qthe Qss = Q = Qdd

Determining PricesDetermining PricesSECTION 2

Meaning the price when all goods Meaning the price when all goods produced are bought.produced are bought.

Quantity

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What is a surplus?What is a surplus?When there are more goods being made than

being soldWhat does this mean?

There are products just sitting on the shelf. If you are a producer are you happy about this? What might you do?

Quantity

P1

P2

P3

P4

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Price

S

D

Eq.

Surplus

What happened to Price, Qs, and Qd?

Is there still a surplus?

What should be done to fix this?

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How the price system handles product How the price system handles product surplusessurpluses lowering product pricesdecreasing quantity supplied increasing quantity demanded

Determining PricesDetermining PricesSECTION 2

Quantity

P1

P2

P4

P3

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Price

S

D

Eq.

What happened to Price, Qs, and Qd?

Shortage

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How the price system handles product How the price system handles product shortages:shortages: increasing product prices increasing quantity supplieddecreasing quantity demand

Determining PricesDetermining PricesSECTION 2

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How shifts in demand and supply How shifts in demand and supply affect market equilibrium:affect market equilibrium:Causes equilibrium to shiftWhat is a determinant of Demand?What is a Determinant of Supply?

Determining PricesDetermining PricesSECTION 2

Price

Quantity

D1D2

S

Eq 1

Eq. 2

P1

Q1

P2

Q2

Product: Potatoes

Surplus

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If demand decreases what happens to:If demand decreases what happens to:Qs?

Equilibrium Price?

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If demand increases what happens to:If demand increases what happens to:Qs?

Equilibrium Price?

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If supply increases what happens to:If supply increases what happens to:Qd?

Equilibrium Price?

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If supply decreases what happens to:If supply decreases what happens to:Qd?

Equilibrium Price?

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Fill in the demand/supply schedule for a cup of coffee. Use the data to create an equilibrium chart.

Price per cup

Quantity Demanded

Quantity Supplied

Choose a determinant of demand and draw a second demand curve that illustrates what would happen if a change in that determinant had an effect on demand. Determinant____________________________________

What happened to the equilibrium point?

Now choose a determinant of supply and draw a second supply curve that illustrates what would happen if a change in that determinant had an effect on supply. Determinant ______________________________________________

What happened to the equilibrium point?

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Directions:1. In groups, you will draw an equilibrium graph

showing: 2. a. All Labels3. b. What happens to the graph because of the

headlines.4. Be sure to include:

1. Increase or Decrease in Supply, Demand, Qs, and Qd. 2. What happens to Equilibrium

Tomorrow you will be presenting your graphs to the class explaining what is happening in the graph.

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1. Product: Hot Dogsa. Actual ingredients in hot dogs released to public. Trust us, you

don’t want to know!!

b. Price of Hot Dog Buns Sky Rocket because Wheat Producers go on strike!!!!

2. Product: Hershey Chocolatea. Halloween is Next Week!!!!

b. Hershey Bars: Part of a Healthy Diet!

3. Product: Headphonesa. Apple to Raise Price on All iPods.

b. Bose introduces headphones to Czech Republic for 1st time ever.

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4. Product: Televisions

a. New Television Producer Hopes to Make Splash With New Slim LCD T.V.

b. Study Shows U.S. Citizens Making 25% Less Than 10 Years Ago.

5. Product: Bananas

a. To Keep Costs low, the Government Will Give Subsidy to Banana Farmers Next Year

b. Ice Cream over produced, Every Thursday for the next year is Free Ice Cream Day!!

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Objectives:Objectives:Why do governments sometimes set prices?What do governments try to accomplish

through price floors, price ceilings, and rationing?

What happens when governments manage prices?

ManagingManaging PricesPrices

SECTION 3

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Reasons governments set prices:Reasons governments set prices: to keep the market functioning smoothly to avoid instability caused by dramatic

price swings

ManagingManaging PricesPrices

SECTION 3

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Tools the government uses to set Tools the government uses to set prices:prices:price floorsprice ceilings rationing

ManagingManaging PricesPrices

SECTION 3

Quantity

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Pf

Price FloorPrice Floor Corn per poundCorn per pound

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Set above EquilibriumCauses a SurplusStops a products price from reaching

Equilibrium, much like a floor stops us from touching the ground.

Price FloorsPrice Floors

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Price CeilingsPrice CeilingsSet below EquilibriumCauses a ShortageStops a products price from reaching

Equilibrium, much like a ceiling stops us from reaching the sky.

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Pc

Price CeilingPrice Ceiling Gas Per GallonGas Per Gallon

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RationingRationingThe government determines how to

distribute a good.Usually used during times of war to ensure

the military receives necessary materials at a low price.-Little competition for the product.

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S1

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Eq.1

RationingRationingS2

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What happens when governments What happens when governments manage prices:manage prices:creates imbalances between supply and

demandprevents markets from reaching equilibriumcan create black markets

ManagingManaging PricesPrices

SECTION 3

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1.1. Describe the limitations of the price system.

2.2. Explain the role of the price system. Be sure to include how the price system encourages market equilibrium.

3.3. How can a shift in demand influence a market’s equilibrium point?

4.4. Why might a government establish a price floor on one good or service and a price ceiling on another?

5.5. Why might a government begin rationing items in the market?

Wrap-UpWrap-Up

CHAPTER 5