Download Markets and Prices

Markets and Prices
What are markets?
• Markets is any place or mechanism where
buyers and sellers of a good or service can get
together to exchange that good or service
Supply and Demand
• The forces of supply and demand, work
together in markets to establish prices
• If supply is high and demand is high, prices go
up
• If supply is high and demand is low, prices go
down
• Why?
Supply and Demand
• If supply is low and demand is high, prices go
up
• If supply is low and demand is low, prices go
down
• Why?
Equilibrium Price
• The point where supply and demand achieve
balance is the equilibrium price
• On the supply and demand curves, this is the
point where they intersect
Shortage
• When supply is low and demand is high, this is
a shortage
• Shortages cause prices to go up
• A shortage signals to producers that prices are
too low
– Why?
Surplus
• When supply is high and demand is low, this is
a surplus
• A surplus causes prices to go down
• A surplus signals that prices are too high
– Why?
Prices as Signals
• Using prices, producers can answer the 3 basic
economic questions
– WHAT to produce
– HOW to produce
– WHOM to produce for
What to Produce
• Consumer’s purchases help producers decide
WHAT to produce
• They focus on providing goods and services
that consumers are willing to buy at prices
that allow the suppliers to earn profits
How to Produce
• A hair salon costs $20 in labor and supplies to
provide a haircut. Consumers are only willing
to pay $15 for a haircut though.
• To stay in business, the hair salon has to figure
out how to provide haircuts in less costly ways
Who to Produce For
• Some businesses aim their goods or services
at the small number of consumers who are
willing to pay higher prices
• Others aim their goods or services at the
larger number of people who want to spend
less
Advantages of Prices
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Prices are neutral
Prices are flexible
Prices allow freedom of choice
Prices are familiar
Prices are Neutral
• Prices are neutral because they do not favor
the consumer nor the producer
• Prices are the result of competition, therefore
represent compromises between the
consumer and producer
Prices are Flexible
• Prices change from time to time
• Unforeseen events such as wars or natural
disasters can affect the supply and demand
for certain items.
– This in turn affects the prices
• Buyers and sellers both react to the new level
of prices and adjust their consumption and
production
Freedom of Choice
• Because of a variety of products that have a
wide range of prices, consumers have many
choices
• If the price of an item is too high, a lowerpriced substitute is usually available
• This allows consumers the ability to choose
what they want to pay for a good or service
Prices are Familiar
• Prices are something we have known about all
our lives
• If something costs $5.00 then we know exactly
how much we have to pay
Price Ceilings
• A price ceiling is a government-set maximum
price that can be charged for goods and
services
• For example, city officials might set a price
ceiling on what landlords may charge for rent
Price Floors
• A price floor is also enforced by the
government
• It is the minimum price that can be charged
for goods and services.
• An example of a price floor, is the minimum
wage; the lowest legal wage that can be paid
to works