Transcript Chapter 5 Notes

Economics
Chapter 5
Section 1
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1.
2.
3.
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?
The Price System
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Prices serve as the main form of
communication between producers and
consumers in a free-enterprise market.
Prices are the way in which producers tell
consumers how much it cost to produce
and distribute a product.
Consumers respond to price by buying the
product or not.
Benefits of the Price System
Information
-Producers: price of resources to make
product, no way to know what product is
most profitable.
-Consumers: helps make informed buying
decisions. Example-cost of sweater
compared to a t-shirt.
1.
Benefits of the Price System
2. Incentives
-Producers: High prices encourage producers
to make more. Lowers prices lead to lower
production.
-Consumers: High prices lead to lower
demand. Low prices lead to higher
demand.
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Benefits of the Price System
3. Choices
-Prices are high which leads to more
production by sellers. More production
leads to more competition that promotes
more products and choices.
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Benefits of the Price System
4. Efficiency
-Provides for the wise use of resources.
-Quickly delivers information to consumers
and producers by helping them make quick
decisions.
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Benefits of the Price System
5. Flexibility
-Prices can easily adjust to trends and
disasters.
Limitations of the Price System
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Sometimes we have market failure
meaning that the market fails to allocate
resources.
The Prices System has three limitations.
Limitations of the Price System
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1. Externalities-when people who do not
produce or consume a good experience some
side effect from the good.
Two types of Externalities:
A. Negative externality-when externality has a
negative impact such as pollution or a dog
barking.
B. Positive externality-when externality has a
positive impact such as education.
Limitations of the Price System
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2. Public Goods-any good or service that is
consumed by all members of a group,
usually provided by the government.
What is the major problem with public
goods?
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Free Riders-people who use public goods, but do
not pay for them.
Limitations of the Price System
3. Instability-flexibility can make the system
unstable. Drastic drop in price may make
some companies go out of business.
Chapter 5
Section 2
Objectives
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What is market equilibrium?
How does the price system handle product
surpluses and shortages?
How do shifts in demand and supply affect
market equilibrium?
Determining Prices
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Price system helps producers and
consumers reach market equilibriumsituation that occurs when the quantity
supplied and the quantity demanded for a
product are equal at the same price.
Point at which the supply curve and
demand curve intersect and a particular
price and quantity is called the equilibrium
point.
Equilibrium
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1.
2.
What happens when there is no market
equilibrium?
Two possible situations:
Surplus-exists when the quantity supplied
exceeds the quantity demanded. This tells
producers that they are charging too much for
their product.
Shortage-exists when the quantity demanded
exceeds the quantity supplied at the price
offered. This tells producers that they need to
raise their price so that demand will decrease.
Shifts in Equilibrium
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We know that there are factors that cause
the demand and supply curves to shift.
When this happens, the equilibrium point
will also shift.
Chapter 5
Section 3
Objectives
1.
2.
3.
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?
Managing Prices
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We know that the price system has
limitations.
-Externalities, Public Goods, and
Instability.
Government steps in to set prices to protect
producers and consumers from dramatic
changes in price.
Setting Prices
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Price Ceiling-government regulation that
sets the maximum price for which a
producer can sell a good.
-Example: Rent Control
Price Floor-government regulation that sets
the minimum price for which a producer
can sell a good.
-Example: Minimum Wage
Consequences of Setting Prices
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If a Price Ceiling is set below the
equilibrium point, then a shortage will
occur.
-Figure 5.4 pg. 109
If a Price Floor is set above the equilibrium
point, then a surplus will occur.
-Figure 5.5 pg. 110
Rationing
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Sometimes supply of a good is so low that
the government has to ration the good.
Rationing-System in which a government or
other institution decides how to distribute a
product.
Example-Food rationing during WWII,
college football ticket rationing.
Consequence of Rationing
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1.
2.
3.
Three Consequence of Rationing:
Unfair-some people get the goods, some do not
receive the goods.
Expensive-must pay for human resources used to
implement and oversee the rationing system.
Black market-unfair distribution of product leads to
the development of an underground market for the
goods that takes advantage of people’s desire for
the good.