1. Prices CHAPTER 5 SECTION 1: The Price System
Holt Economics
11/12/2018
CHAPTER 5
Prices
SECTION 1: The Price System
SECTION 2: Determining Prices
SECTION 3: Managing Prices
Chapter 5

2. 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?

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

4. 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?

5. Market equilibrium is reached when the Qs = Qd
SECTION 2
Determining Prices
Market equilibrium is reached when the Qs = Qd
Meaning the price when all goods produced are bought.

6. S
3.00
2.00
1.00 Pr
ice
Eq. D
Quantity

7. 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?

8. 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

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

10. Pr ice Quantity S Eq. Shortage D What happened to Price, Qs, and Qd?
What happened to Price, Qs, and Qd?
Quantity

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

12. How shifts in demand and supply affect market equilibrium:
SECTION 2
Determining Prices
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?

13. Pr ice Quantity Product: Potatoes S Surplus Eq 1 P1 Eq. 2 P2 D2 D1 Q1

14. If demand decreases what happens to:
Qs?
Equilibrium Price?

15. If demand increases what happens to:
Qs?
Equilibrium Price?

16. If supply increases what happens to:
Qd?
Equilibrium Price?

17. If supply decreases what happens to:
Qd?
Equilibrium Price?

18. 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 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 ______________________________________________

19. In groups, you will draw an equilibrium graph showing: a. All Labels
Directions:
In groups, you will draw an equilibrium graph showing:
a. All Labels
b. 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 Equilibrium
Tomorrow you will be presenting your graphs to the class explaining what is happening in the graph.

20. 1. Product: Hot Dogs
a. 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 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.

21. 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!!

22. 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?

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

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

25. Pr ice Quantity Price Floor Corn per pound S Pf Eq. D 5.00 4.00 3.00
2.00
1.00 Pr
ice Pf
Eq. D
Quantity

26. 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.

27. 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.

28. Pr ice Quantity Price Ceiling Gas Per Gallon S Eq. Pc D 5.00 4.00 3.00
2.00
1.00 Pr
ice
Eq. Pc D
Quantity

29. 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.

30. Pr ice Quantity Rationing S2 S1 Eq.1 D1 5.00 4.00 3.00 2.00 1.00
Quantity

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

32. 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?