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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
We use the economic model to analyze
behavior and make predictions
Figure 6.1 on pg. 143
Shows supply and demand
Adjustment process moves toward market
Prices are relatively stable and quantity of goods or
services is equal to the quantity demanded
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
Explaining and Predicting Price
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
Changes in price are much smaller if
demand/supply is elastic
Changes in Demand
Prices shift due to changes in demand
 Figure 6.4 on pg. 147
Competitive Price Theory
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