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S. 3.00 2.00 1.00. Pr ice. Prices. SECTION 1: The Price System SECTION 2: Determining Prices SECTION 3: Managing Prices. D. 2000 4000 6000 8000 10000 12000 14000. Quantity. SECTION 1. The Price System.

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Quantity

S

3.00

2.00

1.00

Pr

ice

Prices

  • SECTION 1:The Price System

  • SECTION 2:Determining Prices

  • SECTION 3:Managing Prices

D

2000 4000 6000 8000 10000 12000 14000

Quantity


Objectives

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?


What is the price system

SECTION 1

The Price System

What is the Price System?

  • How Producers and Consumers communicate to determine prices.


Objectives1

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?


Market equilibrium is reached when the q s q d

SECTION 2

Determining Prices

Market equilibrium is reached when the Qs = Qd

Meaning the price when all goods produced are bought.


Quantity

S

3.00

2.00

1.00

Pr

ice

Eq.

D

2000 4000 6000 8000 10000 12000 14000

Quantity


What is a surplus

What is a surplus?

  • When there are more goods being made than being sold

  • What does this mean?

    • There are products just sitting on the shelf.

    • If you are a producer are you happy about this?

    • What might you do?


Quantity

Surplus

S

P1

P2

P3

P4

Pr

ice

Eq.

D

2000 4000 6000 8000 10000 12000 14000

Is there still a surplus?

What should be done to fix this?

What happened to Price, Qs, and Qd?

Quantity


How the price system handles product surpluses

SECTION 2

Determining Prices

How the price system handles product surpluses

  • lowering product prices

  • decreasing quantity supplied

  • increasing quantity demanded


Quantity

S

P1

P2

P4

P3

Pr

ice

Eq.

Shortage

D

2000 4000 6000 8000 10000 12000 14000

What happened to Price, Qs, and Qd?

Quantity


How the price system handles product shortages

SECTION 2

Determining Prices

How the price system handles product shortages:

  • increasing product prices

  • increasing quantity supplied

  • decreasing quantity demand


How shifts in demand and supply affect market equilibrium

SECTION 2

Determining Prices

How shifts in demand and supply affect market equilibrium:

  • Causes equilibrium to shift

  • What is a determinant of Demand?

  • What is a Determinant of Supply?


Quantity

Product: Potatoes

S

Surplus

Pr

ice

P1

Eq 1

Eq. 2

P2

D2

D1

Q1

Q2

Quantity


If demand decreases what happens to

If demand decreases what happens to:

  • Qs?

  • Equilibrium Price?


If demand increases what happens to

If demand increases what happens to:

  • Qs?

  • Equilibrium Price?


If supply increases what happens to

If supply increases what happens to:

  • Qd?

  • Equilibrium Price?


If supply decreases what happens to

If supply decreases what happens to:

  • Qd?

  • Equilibrium Price?


Quantity

Fill in the demand/supply schedule for a cup of coffee. Use the data to create an equilibrium chart.

Choose a determinant of demand and draw a second demand curve that illustrates what would happen if a change in that determinant had an effect on demand. Determinant____________________________________

What happened to the equilibrium point?

Now choose a determinant of supply and draw a second supply curve that illustrates what would happen if a change in that determinant had an effect on supply. Determinant ______________________________________________

What happened to the equilibrium point?


Quantity

Directions:

  • In groups, you will draw an equilibrium graph showing:

  • a. All Labels

  • b. What happens to the graph because of the headlines.

  • Be sure to include:

    • Increase or Decrease in Supply, Demand, Qs, and Qd.

    • What happens to Equilibrium

      Tomorrow you will be presenting your graphs to the class explaining what is happening in the graph.


Quantity

1. Product: Hot Dogs

a.Actual ingredients in hot dogs released to public. Trust us, you don’t want to know!!

b.Price of Hot Dog Buns Sky Rocket because Wheat Producers go on strike!!!!

2. Product: Hershey Chocolate

a.Halloween is Next Week!!!!

b.Hershey Bars: Part of a Healthy Diet!

3. Product: Headphones

a.Apple to Raise Price on All iPods.

b.Bose introduces headphones to Czech Republic for 1st time ever.


Quantity

4.Product: Televisions

a.New Television Producer Hopes to Make Splash With New Slim LCD T.V.

b.Study Shows U.S. Citizens Making 25% Less Than 10 Years Ago.

5. Product: Bananas

a.To Keep Costs low, the Government Will Give Subsidy to Banana Farmers Next Year

b.Ice Cream over produced, Every Thursday for the next year is Free Ice Cream Day!!


Objectives2

SECTION 3

ManagingPrices

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?


Reasons governments set prices

SECTION 3

ManagingPrices

Reasons governments set prices:

  • to keep the market functioning smoothly

  • to avoid instability caused by dramatic price swings


Tools the government uses to set prices

SECTION 3

ManagingPrices

Tools the government uses to set prices:

  • price floors

  • price ceilings

  • rationing


Quantity

Price FloorCorn per pound

S

5.00

4.00

3.00

2.00

1.00

Pr

ice

Pf

Eq.

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2000 4000 6000 8000 10000 12000 14000

Quantity


Price floors

Price Floors

  • Set above Equilibrium

  • Causes a Surplus

  • Stops a products price from reaching Equilibrium, much like a floor stops us from touching the ground.


Price ceilings

Price Ceilings

  • Set below Equilibrium

  • Causes a Shortage

  • Stops a products price from reaching Equilibrium, much like a ceiling stops us from reaching the sky.


Quantity

Price CeilingGas Per Gallon

S

5.00

4.00

3.00

2.00

1.00

Pr

ice

Eq.

Pc

D

2000 4000 6000 8000 10000 12000 14000

Quantity


Rationing

Rationing

  • The government determines how to distribute a good.

  • Usually used during times of war to ensure the military receives necessary materials at a low price.-Little competition for the product.


Quantity

Rationing

S2

S1

5.00

4.00

3.00

2.00

1.00

Pr

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Eq.1

D1

2000 4000 6000 8000 10000 12000 14000

Quantity


What happens when governments manage prices

SECTION 3

ManagingPrices

What happens when governments manage prices:

  • creates imbalances between supply and demand

  • prevents markets from reaching equilibrium

  • can create black markets


Quantity

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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