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

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Presentation on theme: "1 SECTION 1: The Price System SECTION 2: Determining Prices SECTION 3: Managing Prices CHAPTER 5 Prices."— Presentation transcript:

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

2 2 Quantity PricePrice S D Prices SECTION 1: The Price System SECTION 2: Determining Prices SECTION 3: Managing Prices

3 3 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 System SECTION 1

4 4 What is the Price System? How Producers and Consumers communicate to determine prices. The Price System SECTION 1

5 5 Role of the price system: to tell consumers how much it costs to produce or distribute a good or service to tell producers how much consumers are willing and able to pay for a product The Price System SECTION 1

6 6 Benefits of the price system: provides information provides incentives provides choice provides efficiency provides flexibility The Price System SECTION 1

7 7 Limitations of the price system: does not account for all production costs and benefits Negative externalities Positive Externalities Public Goods can be unstable The Price System SECTION 1

8 8 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 Prices SECTION 2

9 9 Market equilibrium is reached when the Q s = Q d Determining Prices SECTION 2 Meaning the price when all goods produced are bought.

10 Quantity PricePrice S D Eq.

11 11 What is a surplus? When there are more goods being made than being sold What 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 Quantity P1 P2 P3 P PricePrice S D Eq. Surplus What happened to Price, Qs, and Qd? Is there still a surplus? What should be done to fix this?

13 13 How the price system handles product surpluses lowering product prices decreasing quantity supplied increasing quantity demanded Determining Prices SECTION 2

14 Quantity P1 P2 P4 P PricePrice S D Eq. What happened to Price, Qs, and Qd? Shortage

15 15 How the price system handles product shortages: increasing product prices increasing quantity supplied decreasing quantity demand Determining Prices SECTION 2

16 16 How shifts in demand and supply affect market equilibrium: Causes equilibrium to shift What is a determinant of Demand? What is a Determinant of Supply? Determining Prices SECTION 2

17 PricePrice Quantity D1 D2 S Eq 1 Eq. 2 P1 Q1 P2 Q2 Product: Potatoes Surplus

18 18 If demand decreases what happens to: Q s ? Equilibrium Price?

19 19 If demand increases what happens to: Q s ? Equilibrium Price?

20 20 If supply increases what happens to: Q d ? Equilibrium Price?

21 21 If supply decreases what happens to: Q d ? Equilibrium Price?

22 Indicate what happens to supply and demand in relation to the equilibrium point. Draw what would happen if the price is above equilibrium. Shortage or Surplus? Indicate what happens to supply and demand in relation to the equilibrium point. Draw what would happen if the price is below equilibrium. Shortage or Surplus? EE Draw what would happen to the equilibrium point if the overall demand for the product increased. Draw what would happen to the equilibrium point if the overall supply for the product decreased.

23 23 Use the chart below to create an equilibrium chart in the space to the right. (Figure 5.1 in the text) Price per Cheeseburger Quantity Demanded Quantity Supplied $ $ $ $ $ $ $ At 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 expectations Determinants of supply = government actions, technology, competition, producer expectations, prices of resources and related goods

24 24 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?

25 25 Directions: 1.In groups, you will draw an equilibrium graph showing: 2.a. All Labels 3.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.

26 26 1. Product: Hot Dogs a.Actual ingredients in hot dogs released to public. Trust us, you dont want to know!! b.Price of Hot Dog Buns Sky Rocket because Wheat Producers go on strike!!!! 2. Product: Hershey Chocolate a.Halloween is Next Week!!!! b.Hershey Bars: Part of a Healthy Diet! 3. Product: Headphones a.Apple to Raise Price on All iPods. b.Bose introduces headphones to Czech Republic for 1st time ever.

27 27 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!!

28 28 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? Managing Prices SECTION 3

29 29 Reasons governments set prices: to keep the market functioning smoothly to avoid instability caused by dramatic price swings Managing Prices SECTION 3

30 30 Tools the government uses to set prices: price floors price ceilings rationing Managing Prices SECTION 3

31 Quantity PricePrice S D Eq. PfPf Price FloorCorn per pound

32 32 Set above Equilibrium Causes a Surplus Stops a products price from reaching Equilibrium, much like a floor stops us from touching the ground. Price Floors

33 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 Quantity PricePrice S D Eq. PcPc Price CeilingGas Per Gallon

35 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.

36 Quantity PricePrice S1S1 D1D1 Eq. 1Rationing S2S2

37 37 What happens when governments manage prices: creates imbalances between supply and demand prevents markets from reaching equilibrium can create black markets Managing Prices SECTION 3

38 Describe the limitations of the price system Explain the role of the price system. Be sure to include how the price system encourages market equilibrium How can a shift in demand influence a markets 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-Up CHAPTER 5


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