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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
