Markets and Prices

What are markets? Markets is any place or mechanism where buyers and sellers of a good or service can get together to exchange that good or service

Supply and Demand The forces of supply and demand, work together in markets to establish prices If supply is high and demand is high, prices go up If supply is high and demand is low, prices go down Why?

Supply and Demand If supply is low and demand is high, prices go up If supply is low and demand is low, prices go down Why?

Equilibrium Price The point where supply and demand achieve balance is the equilibrium price On the supply and demand curves, this is the point where they intersect

Shortage When supply is low and demand is high, this is a shortage Shortages cause prices to go up A shortage signals to producers that prices are too low – Why?

Surplus When supply is high and demand is low, this is a surplus A surplus causes prices to go down A surplus signals that prices are too high – Why?

Prices as Signals Using prices, producers can answer the 3 basic economic questions – WHAT to produce – HOW to produce – WHOM to produce for

What to Produce Consumer’s purchases help producers decide WHAT to produce They focus on providing goods and services that consumers are willing to buy at prices that allow the suppliers to earn profits

How to Produce A hair salon costs $20 in labor and supplies to provide a haircut. Consumers are only willing to pay $15 for a haircut though. To stay in business, the hair salon has to figure out how to provide haircuts in less costly ways

Who to Produce For Some businesses aim their goods or services at the small number of consumers who are willing to pay higher prices Others aim their goods or services at the larger number of people who want to spend less

Advantages of Prices Prices are neutral Prices are flexible Prices allow freedom of choice Prices are familiar

Prices are Neutral Prices are neutral because they do not favor the consumer nor the producer Prices are the result of competition, therefore represent compromises between the consumer and producer

Prices are Flexible Prices change from time to time Unforeseen events such as wars or natural disasters can affect the supply and demand for certain items. – This in turn affects the prices Buyers and sellers both react to the new level of prices and adjust their consumption and production

Freedom of Choice Because of a variety of products that have a wide range of prices, consumers have many choices If the price of an item is too high, a lower- priced substitute is usually available This allows consumers the ability to choose what they want to pay for a good or service

Prices are Familiar Prices are something we have known about all our lives If something costs $5.00 then we know exactly how much we have to pay

Price Ceilings A price ceiling is a government-set maximum price that can be charged for goods and services For example, city officials might set a price ceiling on what landlords may charge for rent

Price Floors A price floor is also enforced by the government It is the minimum price that can be charged for goods and services. An example of a price floor, is the minimum wage; the lowest legal wage that can be paid to works