1. HOW PRICES ARE DETERMINED
CHAPTER 5
HOW PRICES ARE DETERMINED

2. A. WHO SETS PRICES?
1. The consumer (the buyer) and the producer (the seller) agree on a price
2. The government does but it is rare in a “free market” economy
3. Businesses and buyers typically set prices

3. SUPPLY AND DEMAND on a Graph
1. Supply and Demand work in opposite directions
2. As prices get higher, businesses are willing to supply more
(and vice-versa for demand and buying products)
3. Equilibrium - the point where buyers and consumers agree on a price
4. At Equilibrium  supply and demand intersect (cross) on the graph
5. Forces can change equilibrium  incomes, consumer tastes, technology, production costs, and resource availability

4. SUPPLY AND DEMAND GRAPH

5. C. Prices above Equilibrium
1. When prices are above what consumers will pay, there will be a surplus of goods and services
2. There will be a surplus of inventory
Can you say “BIG SALE!!”
Can you say “overstock.com”, T-J-Maxx? Ross? Marshalls?

6. D. Prices below Equilibrium
1. When prices go below what consumers expect, there will be a shortage of goods and services
2. The goods and services will be in high demand.

7. SHORTAGES