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?

2
 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

5
 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.

10
 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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