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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 -
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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
QD
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
SurplusS>D100>20
20 100
Shortage Exists when the quantity
demanded exceeds the quantity supplied
How do you graph it?
P
Q
S
D ShortageS<D20<10020 100
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
50 150
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$
100 250
Prices can not above this point!
