Transcript Ch. 6.1 Notes : Prices

Ch. 6 Combined Notes : The
Price System
Price?
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I.
Prices as Signals
A. In our society, prices are determined
by the Supply and Demand of
products.
B. Price Equilibrium > prices of
products eventually reach a mid-point
where supply equals demand
C. this is the price where buyers and sellers
have reached a compromise
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II. Advantages of Our Price System
A. Neutral
1. does not favor buyer or seller
2. results from competition
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B. Flexible
1. depends on certain events
2. encourages change
if something is not
selling
C. No gov cost
1. gov stays out. Lets S & D determine
price
D. Efficient system
1. everyone understands prices and will
act accordingly to buy/sell or not
III. Sometimes, government will not let S & D
determine prices when they establish a…
A. Price Ceiling >> price is set by gov.
below equilibrium price
1. Results in a Shortage of product >>
not enough Supply to meet Demand
a. Example>>>
B. Price Floor >>> gov. sets a minimum
price that is above equilibrium.
1.Example : Agricultural Products
minimum wage laws
new minimum
effective date
wage
1-Jan-08
$8.00
1-Jan-07
$7.50
1-Jan-02
$6.75
1-Jan-01
$6.25
1-Mar-98
$5.75
1-Sep-97
$5.15
1-Mar-97
$5.00
1-Oct-96
$4.75
1-Jul-88
$4.25
2. Results in a Surplus of the
product>>too much supply, not
enough demand
a. Example >>>
C. Prices will not be in the middle if ….
1. the product is a loss leader >
priced below equilibrium
to attract customers
2. buyers are ignorant and can be
taken advantage
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IV.
Predicting Prices (4 steps)
1. mark the current equil. price
2. do the line shift
3. look at the new equil. price
4. Did price increase or decrease?
V.
Example: Will Equil Price Increase or Decrease when each of the
following occurs?
A. S goes up ( shift right)
B. D goes down ( shift left)
C. The cost of computer chips increase. As a
result, computer makers must cut
production of computers.
D. After her official break up with Ken,
sales of Barbie Dolls increased
when she started seeing Blaine.
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