CHAPTER 5

Prices
SECTION 1: The Price System SECTION 2: Determining Prices SECTION 3: Managing Prices

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SECTION 1

The Price System

Objectives:
 What is the role of the price system?  What are the benefits of the price system?  What are the limitations of the price system?

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SECTION 1

The Price System

Role of the price system:
 to tell consumers how much it costs to produce or distribute a good or service  to tell producers how much consumers are willing and able to pay for a product

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SECTION 1

The Price System

Benefits of the price system:
 provides information  provides incentives  provides choice  provides efficiency  provides flexibility
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SECTION 1

The Price System

Limitations of the price system:
 does not account for all production costs and benefits  can be unstable

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SECTION 2

Determining Prices

Objectives:
 What is market equilibrium?  How does the price system handle product surpluses and shortages?  How do shifts in demand and supply affect market equilibrium?

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SECTION 2

Determining Prices

Market equilibrium is reached when the quantity supplied and the quantity demanded for a product are equal at the same price.

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SECTION 2

Determining Prices

How the price system handles product surpluses
 lowering product prices  decreasing quantity supplied  increasing quantity demanded

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SECTION 2

Determining Prices

How the price system handles product shortages:
 increasing product prices  increasing quantity supplied  decreasing quantity demand

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SECTION 2

Determining Prices

How shifts in demand and supply affect market equilibrium:
 They cause the point of market equilibrium to shift accordingly.

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SECTION 3

Managing Prices

Objectives:
 Why do governments sometimes set prices?  What do governments try to accomplish through price floors, price ceilings, and rationing?  What happens when governments manage prices?
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SECTION 3

Managing Prices

Reasons governments set prices:
 to keep the market functioning smoothly  to avoid instability caused by dramatic price swings

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SECTION 3

Managing Prices

What governments try to accomplish by setting prices:
 price floors—used to try to guarantee producers a certain level of income  price ceilings—used to try to maintain affordable costs for goods and services  rationing—used to avoid shortages and to ensure reasonable prices for goods when supplies are low
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SECTION 3

Managing Prices

What happens when governments manage prices:
 creates imbalances between supply and demand  prevents markets from reaching equilibrium  can create black markets

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CHAPTER 5

Wrap-Up
1. Describe the limitations of the price system. 2. Explain the role of the price system. Be sure to include how the price system encourages market equilibrium. 3. How can a shift in demand influence a market’s equilibrium point? 4. Why might a government establish a price floor on one good or service and a price ceiling on another? 5. Why might a government begin rationing items in the market?
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