Download Unit 04: The Price System

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Unit 04: The Price System
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Unit 04: The Price System
1
Objectives about The Price System
EPF.3 The student will demonstrate knowledge of the price system by
a) examining the laws of supply and demand and the determinants of each
b) explaining how the interaction of supply and demand determines equilibrium price
c) by describing the elasticity of supply and demand
d) examining the purposes and implications of price ceilings and price floors
Essential Understandings about The Price System
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When supply or demand changes, market prices adjust, affecting incentives. Prices send signals and
provide incentives to buyers and sellers.
Factors (other than the price of the good or service) which can influence demand or supply are called
determinants.
Markets exist when buyers and sellers interact. This interaction determines market prices and thereby
allocates scarce goods and services.
Prices send signals and provide incentives to buyers and sellers. When supply or demand changes,
market prices adjust, affecting incentives.
A variety of factors influence the degree to which buyers and sellers respond to price changes.
Government-enforced price controls set above or below the equilibrium price distort price signals and
incentives to producers and consumers.
Price ceilings cause persistent shortages, whereas price floors cause persistent surpluses.
Price controls are often advocated by special interest groups.
Essential Questions about The Price System
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Notes
What is supply?
What is the law of supply?
What are the determinants of supply?
What is demand?
What is the law of demand?
What are the determinants of demand?
What is the role of prices?
How does a price change affect incentives for buyers and sellers?
What is a market?
How are market prices determined?
What is equilibrium price?
How can a supply-and-demand graph be used to find equilibrium price?
What happens when price for a good or service is higher than the equilibrium price?
What happens when price for a good or service is lower than the equilibrium price?
How does the graph show what happens to the equilibrium price when one of the determinants of demand or supply changes? What is elasticity?
What determines price elasticity of demand?
What determines price elasticity of supply?
What are government-enforced price ceilings and price floors?
Why might the government institute a price ceiling or price floor?
What are the effects of government-enforced price ceilings and price floors?
Unit 04: The Price System
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The Price System
I.
How do Demand and Price Interact?
1.
Demand is what people are willing and able to buy at various prices
a.
Quantity demanded is a specific amount an individual is willing and able to buy at a given price
2.
The law of demand states that as price increases, the quantity demanded decreases
3.
A demand schedule is a table that shows the quantity demanded at each price
a.
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If price decreases, the quantity demanded increases
When the data are graphed, the result is a demand curve
Emphasize that demand is represented by a curve on a graph, but quantity demanded is a specific
point on that curve. Make sure students use the terms accurately. They often say "demand" when they
mean "quantity demanded."
II. What Can Cause Demand to Change?
1.
Changes cause a shift in the curve
2.
a change in consumers’ incomes
3.
a change in consumers’ preferences
4.
a change in the prices of related goods or services (complements or substitutes)
5.
a change in the number of consumers in a market
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a change in the expectations of buyers.
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Price DOES NOT cause the demand curve to shift
III. How Do Supply and Price Interact?
1.
Supply is what producers are willing and able to supply at various prices
a.
2.
The law of supply states that as price increases, the quantity supplied for a good or service also increases,
a.
3.
Quantity supplied is the quantity producers are willing and able to supply at a specific price
As price decreases, the quantity supplied for a good also decreases
A supply schedule is a table that shows the quantity supplied at different prices
a.
When the data are graphed, the result is a supply curve
Emphasize that supply is represented by a curve on a graph, but quantity supplied is a specific point
on that curve. Make sure students use the terms accurately. They often say "supply" when they mean
"quantity supplied."
IV. What Can Cause Supply to Change?
1.
Changes cause a shift in the curve
2.
changes in the prices of productive resources used to make the good or the service
3.
changes in the technology used to make the good or the service
4.
changes in the profit opportunities available to producers by selling other goods or services
5.
changes in the number of sellers in a market
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changes in the expectations of producers.
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Price DOES NOT cause the demand curve to shift
VI. What Happens When Demand Meets Supply?
1.
Market prices are determined through the buying and selling decisions made by buyers and sellers.
2.
Communication between consumers and producers drives prices to a market equilibrium point at which the quantity
demanded and quantity supplied are equal.
a.
Notes
On a graph, the equilibrium point is the point of intersection of the demand and supply curves
Unit 04: The Price System
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Make sure students understand that right price does not imply a low price or a price they would
necessarily like as consumers. It is simply the location at which the demand and supply curves
intersect.
VII. What Happens When the Price Isn’t “Right”?
1.
If the price is above the equilibrium price, buyers will purchase less than is available, and suppliers will offer more,
creating a surplus. When a surplus exists, prices will decrease until they reach the equilibrium price.
2.
If the price is below the equilibrium price, buyers will want to buy more than is available, and suppliers will want to supply
less. This will result in a shortage. Buyers will bid the price up until it reaches equilibrium price.
3.
Shortages of a product usually result in price increases in a market economy; surpluses usually result in price decreases.
Remind students that adjusting prices is not as easy as these examples make it sound. Prices can be
"sticky" for many reasons. But, given time, they will move to equilibrium.
VIII. How Do Shifts in Demand or Supply Affect Markets?
1.
To analyze how an event will affect market equilibrium, ask yourself these questions:
a.
Does the event affect market demand, supply, or both?
b.
Does the event shift the demand or supply curve to the right (increase) or to the left (decrease)?
c.
What are the new equilibrium price and quantity? How have they changed as a result of the event?
Students often confuse movement along the curve with a shift of the curve. When only price changes,
there is movement along the curve to meet the new quantity demanded or supplied. The curve itself
does not shift.
IX. What Roles Do Prices Play in a Modern Mixed Economy?
a.
Prices convey information by signaling opportunity cost to consumers and helping producers make production
decisions.
b.
Prices provide an incentive for firms and workers to produce.
c.
Prices give markets flexibility to respond to changing conditions.
d.
Prices guide scarce resources to their most efficient uses.
Teaching Tip: Emphasize that in a free market economy, we are not victims of prices. A seemingly
high price is still the "right" price if consumer demand is high or producer supply is low.
X. How Responsive are Consumers and Producers to Price Changes?
1.
Elasticity describes the degree to which buyers and sellers respond to price changes.
2.
The more elastic supply or demand, the more responsive consumers and producers are to price changes (e.g.,
prices go up 10% and quantity demand goes down by 20%).
a.
3.
The more inelastic supply or demand, the less responsive producers are to price changes.
Price inelasticity means that consumers or producers are not very responsive to price changes (e.g., prices go up by 10%
and quantity demanded goes down by 2%).
4.
Price inelastic demand is typical for goods or services that are necessities, have no good substitutes, and/or are
inexpensive relative to one’s income (e.g., insulin, electricity, salt).
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Elasticity of supply is determined by the availability of the raw materials needed for production, available production
capacity, and the time period required to produce more of the good or service.
a.
For example, the supply of seats in a football stadium is fixed; thus the supply is inelastic (higher prices offered
for tickets will not produce more seats in the short run).
b.
The supply of lawn mowing service is elastic. At a higher price more people will be willing to supply the service.
c.
If there is an increase in the price of strawberries, farmers cannot increase their production immediately, so the
supply will be inelastic.
Notes
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6.
Price elastic demand is typical for goods or services that are luxuries or have good substitutes (e.g., expensive cars, a
brand of soft drink).
XI. How Does Government Intervention Affect Markets?
1.
Because of political pressure, governments sometimes implement price controls when prices are considered unfairly high
for consumers or unfairly low for producers.
a.
A price floor, such as minimum wage, prevents prices from going too low. The result is excess supply, which
causes a surplus.
b.
A price ceiling, such as rent control, prevents prices from going too high. The result is excess demand, which
causes a shortage.
2.
Shortages may result in government-imposed rationing, the controlled distribution of a limited supply of a good or service.
Or they may create black markets, in which goods are traded at prices or in quantities higher than allowed by the law.
Teaching Tip: Have students stand and point at the ceiling. A price ceiling blocks their view of the equilibrium price, which
means the price ceiling is set below the equilibrium price. Then have them point at the floor. A price floor blocks their view
of the equilibrium price, which means the price floor is set above the equilibrium price.
Vocab Unit 4
Directions: Fill in the definition for the term listed. Then, in the box on the right, you have to draw a picture OR
write the definition in your own words OR write a sentence using the word that demonstrates its meeting.
Demand
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Processing (Illustration, Summarization, or Sentence)
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Law of Demand
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Processing (Illustration, Summarization, or Sentence)
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Supply
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Processing (Illustration, Summarization, or Sentence)
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Law of Supply
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Processing (Illustration, Summarization, or Sentence)
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Revenue
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Processing (Illustration, Summarization, or Sentence)
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Notes
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Market Equilibrium
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Processing (Illustration, Summarization, or Sentence)
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Equilibrium Price
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Processing (Illustration, Summarization, or Sentence)
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Vocab Unit 4
Directions: Fill in the definition for the term listed. Then, in the box on the right, you have to draw a picture OR
write the definition in your own words OR write a sentence using the word that demonstrates its meeting.
Price Controls
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Processing (Illustration, Summarization, or Sentence)
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Price Floor
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Processing (Illustration, Summarization, or Sentence)
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Price Ceiling
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Processing (Illustration, Summarization, or Sentence)
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Rationing
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Processing (Illustration, Summarization, or Sentence)
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Black Market
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Processing (Illustration, Summarization, or Sentence)
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Notes
Unit 04: The Price System
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Summary
DIRECTIONS: Choose only one of the following:
a) write a summary (25-75 words) of what you believe was the most important aspect of the notes/lecture
b) write what you believe to be the most interesting or memorable part of the notes/lecture (25-75 words)
c) draw something that symbolizes the notes/lecture to you (has to be different than your title page)
Notes
Unit 04: The Price System
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c) by describing the elasticity of supply and demand.
Day 1 How responsive are consumers and producers to price changes? That’s elasticity!
Elasticity describes the degree to which buyers and sellers respond to price changes.
The more elastic supply or demand, the more responsive consumers and producers are to price changes (e.g., prices go up 10% and
quantity demand goes down by 20%).
The more inelastic supply or demand, the less responsive producers are to price changes.
Price inelasticity means that consumers or producers are not very responsive to price changes (e.g., prices go up by 10% and
quantity demanded goes down by 2%).
Price inelastic demand is typical for goods or services that are necessities, have no good substitutes, and/or are inexpensive relative
to one’s income (e.g., insulin, electricity, salt).
Elasticity of supply is determined by the availability of the raw materials needed for production, available production capacity, and
the time period required to produce more of the good or service. For example, the supply of seats in a football stadium is fixed;
thus the supply is inelastic (higher prices offered for tickets will not produce more seats in the short run).
The supply of lawn mowing service is elastic. At a higher price more people will be willing to supply the service. On the other
hand, if there is an increase in the price of strawberries, farmers cannot increase their production immediately, so the supply will
be inelastic.
Price elastic demand is typical for goods or services that are luxuries or have good substitutes (e.g., expensive cars, a brand of soft
drink).
d) examining the purposes and implications of price ceilings and price floors.
Day 1 Price ceilings and floors—oh my!
Day 2 Review supply, demand, equilibrium price, determinants of supply & demand,
elasticity, price ceilings and price floors
Price Ceilings
A price ceiling sets the highest price that can be charged for a good or service. The price is generally set below the equilibrium
price and results in a shortage.
Rent control is an example of setting a price ceiling. Some cities instituted rent controls when housing prices were rising rapidly
and current city residents could no longer afford rent. Rent controls have resulted in a shortage of apartments because they require
owners to accept a price that is lower than the equilibrium price. Rather than accept the low price, owners often convert the
apartments to condominiums and sell them, thus decreasing the supply of available apartments.
Price Floors
A price floor sets the lowest price at which one can buy a good or service. Price floors are generally set above the equilibrium
price and result in a surplus.
Milk support pricing is an example of setting a price floor. Government wanted to be sure that dairy farmers would be guaranteed
a price high enough to keep them in business. Since the price is higher than the equilibrium price, consumers buy less milk and
dairy farmers supply more milk, creating a surplus of milk.
Notes
Unit 04: The Price System
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Summary
DIRECTIONS: Choose only one of the following:
d) write a summary (25-75 words) of what you believe was the most important aspect of the notes/lecture
e) write what you believe to be the most interesting or memorable part of the notes/lecture (25-75 words)
f) draw something that symbolizes the notes/lecture to you (has to be different than your title page)
Notes
Unit 04: The Price System
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