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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 and
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:
1.
2.
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
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