The Price System: Steering Towards Market Equilibrium

1. Chapter 6 Notes The Price System

2. Market Equilibrium • The price system helps producers and consumers reach market equilibrium – • A situation that occurs when the quantity supplied and the quantity demanded for a product are equal at the same price. S M.E. P D Q

3. How does the Price System steer producers and consumers toward the Equilibrium Point? • As producers change prices and the quantity of goods supplied, this adjustment period works to eliminate surpluses and shortages • In turn, the producers will find an equilibrium point where there are limited shortages and surpluses

4. Surplus • Exists when the quantity supplied exceeds the quantity demanded • How do you graph it? S Surplus S>D 100>20 P D 20 Q 100

5. Shortage • Exists when the quantity demanded exceeds the quantity supplied • How do you graph it? S P Shortage S<D 20<100 D Q 20 100

6. Price Floor • Government regulation establishing a minimum price that a price can not go below! • Price Floor exist when there is a surplus! • Often times in the agricultural industry • Graph it!

7. S Prices can not go below the Price floor 5.00$ Price Floor & surplus P D Q 50 150

8. Price Ceiling • Government regulation establishing a maximum price that a price can not go above! • Price Ceilings exist when there is a Shortage! • To protect consumers from price gauging. • Graph it!

9. S P Price Ceiling and Shortage 3.00$ Prices can not above this point! D Q 100 250