Download The Pricing System

The Pricing System
Determining Prices:
How a competitive market works
► Market
Equilibrium (AKA market clearing price)-the price where the amount sellers are willing to
supply equals the amount buyers are willing to
buy.
 both forces are in balance; buyers and sellers are
happy.
► Surpluses—when
the quantity supplied exceeds
the quantity demanded at the price offered
► Shortages—when the quantity demanded exceeds
the quantity supplied at the price offered
Determining Prices:
Equilibrium Price
Determining Prices:
Shortages & Surpluses
► Shortages
► Surpluses
Managing Prices
gov’t sometimes sets prices to protect producers/ consumers from dramatic price
swings
► Price Ceilings (maximum price)-gov’t establishes a maximum price for a particular
good. Prices above it are illegal to buy or sell; not very common
►
 can be used to stop business from gouging customers protects consumers
 Example is rent control, interest rates
►
Price Floors (minimum price)-gov’t establishes a minimum price for a particular
good; prices below it are illegal to buy or sell; more common
 most commonly seen in agriculture, minimum wage protects producers usually
 most economists are opposed to price fixing, upsets natural balance
►
Rationing—gov’t or other institutions decides how to distribute a product.
 distributed by policy, not supply & demand
 rare in U.S.; usually during war or crisis (oil embargo)
►
done with coupons
 sporting events; playoffs to season ticket holders, colleges to students, alumni
 Consequences of rationing
1. unfairness—public left out or not prioritized
2. cost—expensive to implement
3. black markets—encourages goods to be exchanged illegally


ticket scalpers
results in criminal selling of fakes/ nock-offs
Managing Prices:
Price Ceilings & Price Floors
► Price
Ceilings
 Gov’t sets max price
below the equilibrium
► Price
Floors
 Gov’t sets min price
above equilibrium
Questions
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What is a shortage? What conditions will cause a
shortage? How can you correct a shortage?
What is a surplus? What conditions will cause a surplus?
How can you correct a surplus?
In a competitive market, if the level of demand stays
constant, what will happen to the price if supply increases?
Why? If supply decreases? Why?
In a competitive market, if the level of supply stays
constant, what will happen to the price if the demand
increases? Why? If the demand decreases? Why?
Give a real world example of a surplus or shortage you are
aware of and explain in microeconomic terms how the
shortage or surplus occurred?