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

REGULAR PRICE?

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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

effective date

new minimum

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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