Download Prices: How they effect Supply and Demand

Prices: How they effect Supply
and Demand
The whole chapter in one set of notes
Prices
Price is simply the monetary value of a
product as established by supply and
demand
 Prices help decide the what, how, for
whom questions
 Without prices, how would we decide
who gets what?

Rationing
One way of allocation without prices
 Disadvantages:

 Fairness
 High
Administrative Cost
 Diminishing Incentive
Price System at Work
When quantity supplied equals quantity
demanded, equilibrium occurs
 When quantity supplied exceeds
quantity demanded, a surplus occurs
 When quantity demanded exceeds
quantity supplied, a shortage occurs

Price Floors

Price Floors- lowest legal price that can be
paid for a good or service
 These are enacted when the government
thinks prices are too low on an item
 Example: Minimum Wage
 Some economists argue that it increases the
unemployment rate

Causes a surplus of workers
Price Ceilings
Maximum legal price that can be
charged for a product
 Achieves social goals of equity and
security
 Example: Rent Controls in New York
City
 Price ceilings can cause a shortage of
housing available
