PRICES Chapter 5 In a freeenterprise market prices

In a free-enterprise market, prices are the main form of communication between producers and

Any time you buy a good or service, you are speaking the “Language” of

EXAMPLE The price of pizza tells the consumer, “If you want this amount of

If consumers decide not to buy a product at the established price, producers must

MARKET EQUILIBRIUM A price system helps producers and consumers reach market equilibrium, a situation

EQUILIBRIUM POINT The equilibrium point can be shown for a product by plotting its

SURPLUS A surplus exists when the quantity supplied exceeds the quantity demanded at the

SHORTAGE A shortage exists when the quantity demanded exceeds the quantity supplied at the

Remember, because markets change, demand and/or supply curves may shift to the right or

Government sometimes set prices to protect producers and consumers from dramatic price swings –

Price Ceilings – a government regulation that establishes a maximum price for a particular

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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.