- Slides: 12
PRICES Chapter 5
In a free-enterprise market, prices are the main form of communication between producers and consumers.
Any time you buy a good or service, you are speaking the “Language” of prices – prices are the way in which producers tell consumers how much it costs to produce and distribute a good or service.
EXAMPLE The price of pizza tells the consumer, “If you want this amount of pizza, you have to pay this price. ” If you buy the pizza, your response to producers is, “Yes, I want this amount of pizza at this price. ” if you do not buy the pizza, your response is, “No, I do not want to buy this amount of pizza at this price. ”
If consumers decide not to buy a product at the established price, producers must determine whether they can charge a lower price for the product and still make a profit.
MARKET EQUILIBRIUM A price system helps producers and consumers reach market equilibrium, a situation that occurs when the quantity supplied and the quantity demanded for a product are equal at the same price – at this point the needs for both the consumers and producers are satisfied.
EQUILIBRIUM POINT The equilibrium point can be shown for a product by plotting its demand supply curves on the same graph.
SURPLUS A surplus exists when the quantity supplied exceeds the quantity demanded at the price offered – it tells producers that they are charging too much for their product.
SHORTAGE A shortage exists when the quantity demanded exceeds the quantity supplied at the price offered – it tells producers that they are charging too little for their product.
Remember, because markets change, demand and/or supply curves may shift to the right or the left – when one or both of the curves shifts, then the equilibrium price also changes.
Government sometimes set prices to protect producers and consumers from dramatic price swings – they accomplish this through two ways:
Price Ceilings – a government regulation that establishes a maximum price for a particular good – i. e. producers can not charge above this amount – tend to result in shortages. Ex. : rent control 2. Price Floors – a government regulation that establishes a minimum level for prices – more common than price ceilings – tend to result in surpluses. Ex. : minimum wage 1.