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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 • • • • 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