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Prices
The Price System
Determining Prices
SECTION 3: Managing Prices
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SECTION 1
The Price System
Objectives:
 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
SECTION 1
The Price System
What is the Price System?
 How Producers and Consumers
communicate to determine prices.
4
SECTION 2
Determining Prices
Objectives:
 What is market equilibrium?
 How does the price system handle product
surpluses and shortages?
 How do shifts in demand and supply affect
market equilibrium?
8
SECTION 2
Determining Prices
Market equilibrium is reached when
the Qs = Qd
Meaning the price when all goods
produced are bought.
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What is a surplus?
 When there are more goods being made than
being sold
 What does this mean?
 There are products just sitting on the shelf.
 If you are a producer are you happy about this?
 What might you do?
11
Surplus
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IsWhat
therehappened
still a surplus?
to Price, Qs,
and Qd?
What should be done to fix
this?
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SECTION 2
Determining Prices
How the price system handles product
surpluses
 lowering product prices
 decreasing quantity supplied
 increasing quantity demanded
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Shortage
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What happened to Price, Qs,
and Qd?
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SECTION 2
Determining Prices
How the price system handles product
shortages:
 increasing product prices
 increasing quantity supplied
 decreasing quantity demand
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SECTION 2
Determining Prices
How shifts in demand and supply
affect market equilibrium:
 Causes equilibrium to shift
 What is a determinant of Demand?
 What is a Determinant of Supply?
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Product: Potatoes
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Surplus
Eq 1
P1
Eq. 2
P2
D2
Q2
Q1
Quantity
D1
If demand decreases what happens to:
 Qs?
 Equilibrium Price?
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If demand increases what happens to:
 Qs?
 Equilibrium Price?
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If supply increases what happens to:
 Qd?
 Equilibrium Price?
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If supply decreases what happens to:
 Qd?
 Equilibrium Price?
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Fill in the demand/supply schedule
for a cup of coffee. Use the data to
create an equilibrium chart.
Price per
cup
Quantity
Demanded
Quantity
Supplied
Choose a determinant of demand and draw a second
demand curve that illustrates what would happen if a
change in that determinant had an effect on demand.
Determinant____________________________________
What happened to the equilibrium point?
Now choose a determinant of supply and draw a second
supply curve that illustrates what would happen if a
change in that determinant had an effect on supply.
Determinant
______________________________________________
What happened to the equilibrium point?
24
Directions:
1. In groups, you will draw an equilibrium graph
showing:
2. a. All Labels
3. b. What happens to the graph because of the
headlines.
4. Be sure to include:
1. Increase or Decrease in Supply, Demand, Qs, and Qd.
2. What happens to Equilibrium
Tomorrow you will be presenting your graphs to the
class explaining what is happening in the graph.
25
1.
Product: Hot Dogs
a. Actual ingredients in hot dogs released to public. Trust us, you
don’t want to know!!
b.
2.
Product: Hershey Chocolate
a. Halloween is Next Week!!!!
b.
3.
Hershey Bars: Part of a Healthy Diet!
Product: Headphones
a. Apple to Raise Price on All iPods.
b.
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Price of Hot Dog Buns Sky Rocket because Wheat Producers go on
strike!!!!
Bose introduces headphones to Czech Republic for 1st time ever.
4.
Product: Televisions
a. New Television Producer Hopes to Make Splash With New Slim
LCD T.V.
b.
5.
Product: Bananas
a. To Keep Costs low, the Government Will Give Subsidy to Banana
Farmers Next Year
b.
27
Study Shows U.S. Citizens Making 25% Less Than 10 Years Ago.
Ice Cream over produced, Every Thursday for the next year is Free
Ice Cream Day!!
SECTION 3
Managing Prices
Objectives:
 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?
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SECTION 3
Managing Prices
Reasons governments set prices:
 to keep the market functioning smoothly
 to avoid instability caused by dramatic
price swings
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SECTION 3
Managing Prices
Tools the government uses to set
prices:
 price floors
 price ceilings
 rationing
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Price Floor
Corn per pound
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Price Floors
 Set above Equilibrium
 Causes a Surplus
 Stops a products price from reaching
Equilibrium, much like a floor stops us from
touching the ground.
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Price Ceilings
 Set below Equilibrium
 Causes a Shortage
 Stops a products price from reaching
Equilibrium, much like a ceiling stops us
from reaching the sky.
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Price Ceiling
Gas Per Gallon
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Pc
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Rationing
 The government determines how to
distribute a good.
 Usually used during times of war to ensure
the military receives necessary materials at a
low price.-Little competition for the product.
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Rationing
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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
37
CHAPTER 5
Wrap-Up
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?
38