CHAPTER 6: PRICES
SECTION 1: COMBINING
SUPPLY AND DEMAND
A Balanced Market
• Equilibrium—the
point at which
quantity demanded
and quantity supplied
are equal.
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$
D
QTY
EXCESS DEMAND
• Qty demanded is more
than quantity supplied
• When the actual price
in a market is below the
equilibrium.
– Buyers encouraged
– Sellers discouraged
• Sellers will continue to
raise prices until
demand diminishes
– Search for the highest
price market will bear.
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EXCESS
QTY
D
EXCESS SUPPLY
• Occurs when quantity
supplied exceeds
quantity demanded.
• Any price above the
equilibrium point.
EXCESS
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QTY
Price Ceiling
• The price is held
below the equilibrium
price so it will not
climb higher. ( A price
ceiling is created)
•Rent in large
cities can be like
this to make sure
the price is still
affordable
•Example pg
129
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Price Floor
• The price is not
allowed to drop below a
certain price. ( A price
floor is created)
•Examples are
minimum wage and
for corn. A low point
is established,
ensuring that
workers and farmers
will get at least a
certain amount for
their product.
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SECTION I ASSESSMENT
• Section 1: 1-4, 6-7
• Worksheet
• End of Chapter: 1-8
REPORT
• Select one of the Fortune 500 companies, as
listed—no duplicates—first come, first
served.
• 3 page report—taking one product/product
line from this company and analyzing how
they use/used supply and demand to
determine the price level of the product.
REPORT
• Parts of the report:
– Brief company and product history.
– Price history—make sure you compare to size of the
product when necessary.
– How has market equilibrium changed and how did this
affect the supply and demand for the product in
question. What made these changes—be specific
– What happened after, or what is going to happen with
this product.
– Include a graph showing the effects that shifts in supply
and demand had on the product.
CHAPTER 6: PRICES
SECTION 2: CHANGES IN
EQUILIBRIUM
Market Scenario #1
• Producers of the
cassette tape after
the introduction of
the cd player.
• What caused the
shift
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QTY
Market Scenario #2
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$
D¹
QTY
• The
government
cuts back the
taxes on
diesel fuel—
what
happens for
Van Wyk
Trucking?
• What caused
the shift
Market Scenario #3
•It has been reported that
coconut oil is found to be
the elixir needed for
youthful health and
appearance.
S¹
$
•What caused the shift?
D¹
QTY
Market Scenario #4
S¹
The GI Joes with the
kung fu grip is “the”
toy to have as
Christmas approaches.
$
What causes the shift?
D¹
QTY
CHAPTER 6: PRICES
SECTION 3: THE ROLE OF
PRICES
The Role of Prices
•The free market economy is
the most efficient way to
distribute, regulate, and
allocate goods. This is done
with prices
•Imagine what it would be
like without prices—trying
to acquire products and
services.
Advantages of Prices
• Price as an incentive
– Prices serve as a sign
to buyers and sellers.
– How to adjust.
– Direction to adjust
Advantages of Prices
• Prices as Signals
– When to get into
the market and
when to get out.
– Consumers—
when to buy and
when to wait.
Advantages of Prices
• Flexibility
– Prices are used to adjust
supply. Easier than
changing production.
– Supply Shock—a
sudden shortage of a
good
– Rationing—a system of
allocating scarce goods
and services using
criteria other than price.
Advantages of Prices
• Price System is free
– No administration
costs
– Decisions made by
dollar vote vs. a
controlled economic
system.
Variety of Choices
• Many choices of price and
quality vs. a command
economy.
• Price controls rarely
necessary in market
economy.
• Black Market-allows
consumers to pay more so
they can buy a good when
rationing makes it
otherwise unavailable.
Market Problems
• Imperfect competition
– Cause high prices
• Spillover costs
(externalities)—costs of
production that affect
people who have no
control over how much of
a good is produced.
• Imperfect information
Ty Beanie Babies
• http://www.aboutbeanies.com/marketing.html
SECTION II & III ASSESSMENT
• Section 2: 1-4
• Section 3: 1-4,6
• End of Chapter questions—9-13
Graphically show 14 & 15, 17