1. Chapter 6:
Price

2. Objectives Explain how prices act as signals.
Describe the advantages of using prices as a way to allocate economic products
Understand how prices are determined in a competitive market.
Explain how economic models can be used to predict & explain price changes.
Describe ways in which interfering with prices can distort the market.

3. price market equilibrium surplus shortage equilibrium price
Ch 6 Key Terms
price
market equilibrium
surplus
shortage
equilibrium price
price ceiling
price floor

4. What is price?
The monetary value of a product as established by supply & demand
High prices signal producers to produce more & buyers to buy less
Low prices signal producers to produce less & buyers to buy more

5. Prices perform the allocating of goods & services function well because:
They are neutral – do not favor buyer or seller
They are flexible – can accommodate change
They have no cost of administration – no outside interference, govt needed
They are familiar & easily understood – quick decision-making

6. The Price System at Work
To show the price adjustment process between buyers & sellers, supply & demand are graphed together
The interaction of buyers & sellers results in a price agreeable to all

7. In a competitive market, adjustment process moves toward market equilibrium – a situation in which prices are relatively stable; quantity supplied is equal to quantity demanded

8. A surplus occurs when quantity supplied is greater than quantity demanded at a given price
Price tends to go down as a result of surplus
A shortage occurs when quantity demanded is greater than quantity supplied at a given price
Price & quantity supplied typically rise as a result of a shortage

9. The equilibrium price is the price that “clears the market” by leaving neither a surplus nor a shortage at the end of the trading period
The market tends to seek its own equilibrium

10. Distorting the Market
Govt may set prices at socially desirable levels to achieve social goals
Prices not allowed to adjust to their equilibrium levels
Price ceiling: a maximum legal price that can be charged for a product (Ex. rent controls in NYC)
Price floor: lowest legal price that can be paid for a good or service (Ex. minimum wage)