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Chapter 6 Section 2
If a business has many
extra units of a product
not being sold—how does
this affect price?
Price Adjustment Process
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We use the economic model to analyze
behavior and make predictions
Figure 6.1 on pg. 143
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Shows supply and demand
Adjustment process moves toward market
equilibrium
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Prices are relatively stable and quantity of goods or
services is equal to the quantity demanded
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Surplus and Shortage (Figure 6.2 on pg. 145)
Surplus—situation in which the quantity supplied is
greater than the quantity demanded at a price
 Shortage—situation in which quantity demanded is
greater than the quantity supplied at a price
 Equilibrium price—the price that “clears the
market” by leaving neither a surplus nor a shortage
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Explaining and Predicting Price
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Changes in Supply
Prices shift due to changes in supply
 Farmers are example because price of crops
depends on supply (depends on the weather)
 Figure 6.3 on pg. 146
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Elasticity
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Changes in price are much smaller if
demand/supply is elastic
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Changes in Demand
Prices shift due to changes in demand
 Figure 6.4 on pg. 147
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Competitive Price Theory
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Prices of some foods and other items will be
generally similar from one store to the next
When prices are different—it may be because of
advertising or buyers are not informed
 Example: Gas prices are usually higher near the
expressway because travelers do not know the location of
lower cost stations in unfamiliar areas
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