1. Setting Prices Advantages of prices –Prices are neutral because they do not favor the buyer or the seller. They are the result of competition Prices are flexible, allowing for expected changes in the market Prices have no administration costs. Prices are familiar and easily understood

2. The price adjustment process Together supply and demand form a complete picture of the market. The equilibrium price is the price at which supply and demand meet Surpluses occur when supply exceeds demand Shortages occur when demand exceeds supply Price adjustments help a competitive market reach equilibrium

3. Explaining and Predicting Prices A change in price is normally the result of a change in supply, a change in demand, or both Even small changes in an inelastic supply can cause big changes in price. Elastic supply and demand help keep prices from changing dramatically

4. Competitive price theory In theory, a competitive market allocates resources efficiently. To be competitive, sellers are forced to lower prices Competition among buyers keeps prices from falling too low.

5. Price ceilings and price floors Price ceiling Law sets price ceiling, or maximum price that sellers can charge for a good or a service. Price ceilings often set by local and federal governments. Excess demand and excess supply occur when quantity demanded is greater or less than quantity supplied Price floor Government sets price floor, or minimum price that must be paid for a good or service Minimum wage is the price floor that an employer must pay their workers per hour