CHAPTER 6:
PRICES
Section 6.1
Prices
• Price
– Monetary value of a product
– Act as signals that tell people to buy
more or less of a product, and producers
to produce more or less of a product
• Price helps determine the WHAT to
produce
– Producers will profit as long as the cost
the item remains lower than the price to
consumers
– Price system is more efficient when
markets are competitive
Advantages
of Price
• Prices are neutral
– They don’t favor either side
• Prices are flexible
– They can adapt to change
• Prices are familiar
– Easy to understand
• Prices are efficient
– The market determines price
without administration
Section 6.2
Buyers vs.
Sellers
• When prices are too high
– A surplus will occur when QS is
greater than QD at a given price
– Prices tend to decrease as a
result of the surplus
• When prices are too low
– A shortage will occur when QD is
greater than QS at a given price
– Prices will tend to increase as a
result of the shortage
Equilibrium
• Equilibrium price
– The point where QS = QD
– The point on a graph where
price intersects with quantity
– The price that clears the
market
• Equilibrium quantity
– Quantity supplied that is equal
to the quantity demanded at
the equilibrium price
• How do changes in supply/demand affect prices?
– When demand increases, the price increases
– When demand decreases, the price decreases
– When supply increases, the price decreases
– When supply decreases, the price increases
Section 6.3
Price
Controls
–Price ceilings
• The highest legal price
that can be charged for a
product
–Price floors
• The lowest legal price
that be paid for a product
Price
Controls
• Subsidy
– Government payment to encourage or
protect a certain economic activity
• Target price
– Price floor for agricultural products set
by the government to stabilize farm
prices
– The government ensures farmers receive
a target price for their goods by granting
nonrecourse loans
• Nonrecourse loan
– Loan that carries neither a penalty nor
further obligation to repay
FOUR ADVANTAGES OF PRICES
NEUTRAL
FLEXIBLE
FAMILIAR
EFFICIENT
Cause and effect of surplus and shortage
Cause
Effect
QS greater than QD
Surplus
Prices decrease
QS less than QD
Shortage
Prices increase