Presentation on theme: "Prices CHAPTER 5 SECTION 1: The Price System"— Presentation transcript:
1 Prices CHAPTER 5 SECTION 1: The Price System Holt Economics4/1/2017CHAPTER 5PricesSECTION 1: The Price SystemSECTION 2: Determining PricesSECTION 3: Managing PricesChapter 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 1The Price SystemRole of the price system:to tell consumers how much it costs to produce or distribute a good or serviceto tell producers how much consumers are willing and able to pay for a product
4 Benefits of the price system: SECTION 1The Price SystemBenefits of the price system:provides informationprovides incentivesprovides choiceprovides efficiencyprovides flexibility
5 Limitations of the price system: SECTION 1The Price SystemLimitations of the price system:does not account for all production costs and benefitscan 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 2Determining PricesMarket 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 2Determining PricesHow the price system handles product surpluseslowering product pricesdecreasing quantity suppliedincreasing quantity demanded
9 How the price system handles product shortages: SECTION 2Determining PricesHow the price system handles product shortages:increasing product pricesincreasing quantity supplieddecreasing quantity demand
10 How shifts in demand and supply affect market equilibrium: SECTION 2Determining PricesHow 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 3Managing PricesReasons governments set prices:to keep the market functioning smoothlyto avoid instability caused by dramatic price swings
13 What governments try to accomplish by setting prices: SECTION 3Managing PricesWhat governments try to accomplish by setting prices:price floors—used to try to guarantee producers a certain level of incomeprice ceilings—used to try to maintain affordable costs for goods and servicesrationing—used to avoid shortages and to ensure reasonable prices for goods when supplies are low
14 What happens when governments manage prices: SECTION 3Managing PricesWhat happens when governments manage prices:creates imbalances between supply and demandprevents markets from reaching equilibriumcan 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?