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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