1. Prices CHAPTER 5 SECTION 1: The Price System
Holt Economics
4/1/2017
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. Role of the price system:
SECTION 1
The Price System
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

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

5. Limitations of the price system:
SECTION 1
The Price System
Limitations of the price system:
does not account for all production costs and benefits
can be unstable

6. 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?

7. SECTION 2
Determining Prices
Market equilibrium is reached when the quantity supplied and the quantity demanded for a product are equal at the same price.

8. 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

9. 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

10. How shifts in demand and supply affect market equilibrium:
SECTION 2
Determining Prices
How shifts in demand and supply affect market equilibrium:
They cause the point of market equilibrium to shift accordingly.

11. 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?

12. 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

13. What governments try to accomplish by setting prices:
SECTION 3
Managing Prices
What governments try to accomplish by setting prices:
price floors—used to try to guarantee producers a certain level of income
price ceilings—used to try to maintain affordable costs for goods and services
rationing—used to avoid shortages and to ensure reasonable prices for goods when supplies are low

14. 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

15. 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?