Chapter 21.3
Markets and Prices
Supply and Demand at Work
• Markets bring buyers and sellers together. The
forces of supply and demand work together in
markets to establish prices. In our economy,
prices form the basis of economic decisions.
See graph pg. 472.
• A surplus is the amount by which the quantity
supplied is higher than the quantity demanded.
On the graph, it appears as the horizontal
distance between the supply and demand
curves at any point above where the curves
cross.
continued
• A surplus signals that the price is too high. At
that price, consumers will not buy all of the
product that suppliers are willing to supply. In a
competitive market, a surplus will not last.
Sellers will lower their price to sell their goods.
• A shortage is the amount by which the quantity
demanded is higher than the quantity supplied.
On the graph, it appears as the horizontal
distance between the supply and demand
curves at any point below where the curves
cross.
continued
• A shortage signals that the price is too low.
At that price, suppliers will not supply all of
the product that consumers are willing to
buy. In a competitive market, a shortage
will not last. Sellers will raise thir price.
continued
• When operating without restriction, our
market economy eliminates shortages and
surpluses. Over time, a surplus forces the
price down and a shortage forces the price
up until supply and demand are balanced.
The point where they achieve balance is
the equilibrium price. At this price,
neither a surplus nor a shortage exists.
continued
• Once the market price reaches
equilibrium, it tends to stay there until
either supply or demand changes. When
that happens, a temporary surplus or
shortage occurs until the price adjusts to
reach a new equilibrium price.
continued
• Sometimes the gov’t sets the price of a
product because it believes the forces of
supply and demand are unfair. A price
ceiling is a gov’t-set maximum price that
can be charged for a good or a service. A
price floor is a gov’t-set minimum price
that can be charged for a good or service.
Prices as Signals
• Prices are signals that help businesses
and consumers make decisions. They
also help answer the basic economic
questions.
• Consumers’ purchases help producers
decide WHAT to produce. Producers
focus on goods and services that
consumers are willing to buy prices that
yield a profit.
continued
• Prices help businesses and consumers decide
HOW to produce. To stay in business, a supplier
must find a way to provide a good or service at a
price consumers will pay.
• Prices help businesses and consumers decide
FOR WHOM to produce. Some businesses aim
their products at a small number of consumers
who will pay higher prices. Others try to sell to
larger numbers of people who want to spend
less.
continued
• Consumers look for the best value for what they
spend. Producers seek the best price and profit
for what they have to sell. The information that
prices provide allows people to work together to
produce more of the things people want.
• Prices favor neither producer nor consumer.
They are a compromise that results from
competition between buyers and sellers. The
more competitive the market, the more efficient
the price adjustment process.
continued
• Prices are flexible. Unforeseen events affect
supply and demand. Buyers and sellers react to
the new level of prices by adjusting their
consumption and production. Soon, the system
is functioning smoothly again.
• The price system provides for freedom of choice.
A market economy provides consumers a variety
of products and prices from which to choose.
continued
• In command economies, gov’t planners decide
how much of each product to produce and limit
the product’s variety. Products are offered at
artificially low prices, but seldom are enough
produced to satisfy everyone.
• Prices are familiar. People can make buying
decisions quickly and efficiently because they
know exactly how much they would have to pay
for the product.