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Chapter 6.3 Notes
The Price System
The Language Of Price



A system that is a form of communication
between producers and consumers.
If the consumer wants to buy somewhere
else because the price if too high, then the
producer must decide if he/she must lower
the price.
If consumers are consuming, producers may
try and increase their profits by raising the
prices.
Benefits to the Price System



Information – Both
producers and
consumers need to
gather information.
Incentives – encourages
producers and
consumers to behave in
a certain way
Flexibility – the supply
and demand of goods
of a product change
constantly – natural
disasters, floods, work
stoppages-


Choice – By
encouraging
participation in the
markets, the price
system increases
choices in those
markets
Efficiency - provides for
the wise use of
resources– key benefit
of the price system -
Limitations of the Price System


Market Failures – the price system fails to
account for the costs
Externalities – the production of goods
sometimes result in side effects for people
not directly connected to the production or
consumption


Positive externality – restaurant near a factory
Negative externality – air pollution
Limitation continued


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Public goods – the price system fails to
assign the costs of public goods
A public good is any good or service
that is consumed by all members of a
group
National defense is a good example
because maybe you are a pacifist!
Chapter 5 sec.2
Determining Prices
Market Equilibrium


The 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
S
the same price.
M.E.
P
D
Q
How does the Price System steer producers and
consumers toward the Equilibrium Point?


As producers change prices and the
quantity of goods supplied, this
adjustment period works to eliminate
surpluses and shortages
In turn, the producers will find an
equilibrium point where there are
limited shortages and surpluses
Surplus


Exists when the quantity supplied
exceeds the quantity demanded
How do you graph it?
S
Surplus
P
S>D
D
20
Q
100
100>20
Shortage


Exists when the quantity demanded
exceeds the quantity supplied
How do you graph it?
S
P
D
20
Q
100
Shortage
S<D
20<100
Price Floor


Government regulation establishing a
minimum price that a price can not go
below!
Price Floor exist when there is a
surplus!


Often times in the agricultural industry
Graph it!
Prices can not go
below the Price floor
S
Price Floor
&
surplus
5.00$
P
50
Q
D
150
Price Ceiling




Government regulation establishing a
maximum price that a price can not go
above!
Price Ceilings exist when there is a
Shortage!
To protect consumers from price
gauging.
Graph it!
S
P
3.00$
Prices can
not above
this point!
100
Q
D
250
Price
Ceiling
and
Shortage