ChapterChapter

PricePrice6

Objectives: Students will learn…

How the market establishes an equilibrium priceHow the equilibrium price balances supply &

demandHow 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.

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.

PRICEPRICE

Signals:

Economic Indicators

Prices are

signals!

Price up increase

production

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)

Quantity Supplied Factors

• Price of Products

• Price of related goods

• Number of suppliers in the Market

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No Surplus

No Shortage

Most

efficient

method to

allocate

resources

What will happen to

the equilibrium price

if the demand for CDs

suddenly increases?

But in reality

CD demand has

decreased

Therefore if the

supply remains the

same the price has

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Black Market• A market where regulations and laws are

not practiced when there are exchanges of goods and services.

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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.

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Price ceilings usually

protect buyers

Price floors usually

protect sellers