STARTER Do prices provide information about markets? If so, what information? Do prices provide motivation or incentives to both producers and consumers? If so, how?

Demand, Supply, and Prices Chapter 6.1, 6.2, 6.3

Equilibrium Price Equilibrium price- the price at which quantity demanded and quantity supplied are the same. Why the concept matters? In a market economy, the forces of demand and supply work together to set a price that buyers and sellers find acceptable.

Reaching the Equilibrium Price Trial and error may be necessary for market to arrive at equilibrium Market may have surplus--more quantity supplied than demanded Market may have shortage--more quantity demanded than supplied Marketers sometimes overestimate popularity, others underestimate

Surplus and Shortage With surplus, prices tend to fall; producers cut back production With shortage, prices rise; producers increase quantity supplied

Change in Demand and Equilibrium Price Decrease in demand at every price shifts demand curve to left demand curve intersects supply curve at lower price equilibrium price falls, fewer units sold even though price is lower With increase in demand, demand curve shifts to right equilibrium price rises, more units sold even at higher prices

Change in Supply and Equilibrium Price If supply at every price decreases, supply curve shifts to left curves intersect at higher price: equilibrium price rises If supply increases, supply curve shifts to right equilibrium price falls as more units available at every price

Price System Competitive pricing--sell products at lower prices than others – lures customers away from rival producers maintains overall profits by selling more units Characteristics of the Price System Neutral: interaction of consumers, producers sets equilibrium price Market driven: market forces, not central planners, determine prices Flexible: surpluses, shortages lead producers to change prices Efficient: prices adjust until maximum number of products sold

Prices Motivate Producers and Consumers Prices and Producers Prices signal whether it is good time to enter or leave a market Rising prices create expectation of profits, leading producers to enter Falling prices and possibility of losses lead producers to leave Prices and Consumers Surpluses result in lower prices that motivate consumers to buy producers signal to consumers through advertising, store displays High prices usually encourage consumers to buy substitutes may signal shortage of a product may signal product has a higher status than others

Government Imposed Price Ceilings Government interferes to keep some prices from going too high Price ceiling--legal maximum price a seller may charge for a product set below the equilibrium price, so shortage results

Government imposed Price Floor Government intervenes to increase income to certain producers Price floor--legal minimum price buyers may pay for product

Rationing Resources and Products In national emergency, government may distribute products, resources Rationing--way of allocating products using factors other than price Black market--illegal buying and selling of products violates price controls, rationing