Presentation on theme: "Prices CHAPTER 5 SECTION 1: The Price System"— Presentation transcript:
1 Prices CHAPTER 5 SECTION 1: The Price System Holt Economics4/1/2017CHAPTER 5PricesSECTION 1: The Price SystemSECTION 2: Determining PricesSECTION 3: Managing PricesChapter 5
2 Prices Pr ice Quantity SECTION 1: The Price System 3.002.001.00PricePricesSECTION 1: The Price SystemSECTION 2: Determining PricesSECTION 3: Managing PricesDQuantity
3 Objectives: The Price System SECTION 1 What is the role of the price system?What are the benefits of the price system?What are the limitations of the price system?
4 What is the Price System? SECTION 1The Price SystemWhat is the Price System?How Producers and Consumers communicate to determine prices.
5 Role of the price system: SECTION 1The Price SystemRole of the price system:to tell consumers how much it costs to produce or distribute a good or serviceto tell producers how much consumers are willing and able to pay for a product
6 Benefits of the price system: SECTION 1The Price SystemBenefits of the price system:provides informationprovides incentivesprovides choiceprovides efficiencyprovides flexibility
7 Limitations of the price system: SECTION 1The Price SystemLimitations of the price system:does not account for all production costs and benefitsNegative externalitiesPositive ExternalitiesPublic Goodscan be unstable
8 Objectives: Determining Prices SECTION 2 What is market equilibrium? How does the price system handle product surpluses and shortages?How do shifts in demand and supply affect market equilibrium?
9 Market equilibrium is reached when the Qs = Qd SECTION 2Determining PricesMarket equilibrium is reached when the Qs = QdMeaning the price when all goods produced are bought.
11 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?
12 Pr ice Quantity Surplus S Eq. D Is there still a surplus? Is there still a surplus?What should be done to fix this?What happened to Price, Qs, and Qd?Quantity
13 How the price system handles product surpluses SECTION 2Determining PricesHow the price system handles product surpluseslowering product pricesdecreasing quantity suppliedincreasing quantity demanded
14 Pr ice Quantity S Eq. Shortage D What happened to Price, Qs, and Qd? What happened to Price, Qs, and Qd?Quantity
15 How the price system handles product shortages: SECTION 2Determining PricesHow the price system handles product shortages:increasing product pricesincreasing quantity supplieddecreasing quantity demand
16 How shifts in demand and supply affect market equilibrium: SECTION 2Determining PricesHow shifts in demand and supply affect market equilibrium:Causes equilibrium to shiftWhat is a determinant of Demand?What is a Determinant of Supply?
18 If demand decreases what happens to: Qs?Equilibrium Price?
19 If demand increases what happens to: Qs?Equilibrium Price?
20 If supply increases what happens to: Qd?Equilibrium Price?
21 If supply decreases what happens to: Qd?Equilibrium Price?
22 Draw what would happen if the price is above equilibrium. Draw what would happen if the price is below equilibrium.EEIndicate what happens to supply and demand in relation to the equilibrium point.Indicate what happens to supply and demand in relation to the equilibrium point.Shortage or Surplus?Shortage or Surplus?Draw what would happen to the equilibrium point if the overall supply for the product decreased.Draw what would happen to the equilibrium point if the overall demand for the product increased.
23 Price per Cheeseburger Use the chart below to create an equilibrium chartin the space to the right. (Figure 5.1 in the text)Price per CheeseburgerQuantity DemandedQuantity Supplied$1.00600$1.50500100$2.00400200$2.50300$3.00$3.50$4.00At what price per cheeseburger is market equilibrium reached? ________In the above example, what would be the consequence of charging $3.50 per burger? Show on the chart.What if the vendor charged only $1.50 per burger? Show on the chart.You know from earlier chapters that there are factors that can cause demand or supply to shift.These factors include:Determinants of demand = consumer tastes, market size, income, prices of related goods, and consumer expectationsDeterminants of supply = government actions, technology, competition, producer expectations, prices of resources and related goods
24 Fill in the demand/supply schedule for a cup of coffee Fill in the demand/supply schedule for a cup of coffee. Use the data to create an equilibrium chart.Price per cupQuantity DemandedQuantity SuppliedChoose 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 ______________________________________________
25 In groups, you will draw an equilibrium graph showing: a. All Labels Directions:In groups, you will draw an equilibrium graph showing:a. All Labelsb. What happens to the graph because of the headlines.Be sure to include:Increase or Decrease in Supply, Demand, Qs, and Qd.What happens to EquilibriumTomorrow you will be presenting your graphs to the class explaining what is happening in the graph.
26 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.
27 4. Product: Televisionsa. 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: Bananasa. To Keep Costs low, the Government Will Give Subsidy to Banana Farmers Next Yearb. Ice Cream over produced, Every Thursday for the next year is Free Ice Cream Day!!
28 Objectives: Managing Prices SECTION 3 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?
29 Reasons governments set prices: SECTION 3Managing PricesReasons governments set prices:to keep the market functioning smoothlyto avoid instability caused by dramatic price swings
30 Tools the government uses to set prices: SECTION 3Managing PricesTools the government uses to set prices:price floorsprice ceilingsrationing
31 Pr ice Quantity Price Floor Corn per pound S Pf Eq. D 5.00 4.00 3.00 2.001.00PricePfEq.DQuantity
32 Price Floors Set above Equilibrium Causes a Surplus Stops a products price from reaching Equilibrium, much like a floor stops us from touching the ground.
33 Price Ceilings Set below Equilibrium Causes a Shortage Stops a products price from reaching Equilibrium, much like a ceiling stops us from reaching the sky.
34 Pr ice Quantity Price Ceiling Gas Per Gallon S Eq. Pc D 5.00 4.00 3.00 2.001.00PriceEq.PcDQuantity
35 Rationing The 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.
37 What happens when governments manage prices: SECTION 3Managing PricesWhat happens when governments manage prices:creates imbalances between supply and demandprevents markets from reaching equilibriumcan create black markets
38 Wrap-Up CHAPTER 5 1. Describe the limitations of the price system. 2. Explain the role of the price system. Be sure to include how the price system encourages market equilibrium.3. How can a shift in demand influence a market’s equilibrium point?4. Why might a government establish a price floor on one good or service and a price ceiling on another?5. Why might a government begin rationing items in the market?