Notebook # 16 -Economics 6-2

The Price system at work

Economics 6-2The price system at work

ESSENTIAL QUESTION:

How are prices determined in a competitive market?

Economics 6-2The Price system at work

GPS STANDARD: SSEMI2- The student will explain how…prices and profits work to determine production and distribution in a market economy.

Economics 6-2The Price system at work

• One of the most appealing features of a competitive market economy is that everyone who participates has a hand in determining prices.

•This is why economists consider prices to be neutral and impartial.

Economics 6-2The Price system at work

• The process of establishing prices is remarkable because buyers and sellers have

exactly the opposite hopes and desires.

•Buyers want to find good buys at low prices.

• Sellers hope for high prices and large profits. less and for buyers to buy more.

Economics 6-2The Price system at work

• The process of establishing prices is remarkable because buyers and sellers have

exactly the opposite hopes and desires.

Economics 6-2The Price system at work

• Buyers want to find good buys at low prices. Sellers hope for high prices and large profits.

•Neither can get exactly what they want, so some adjustment is necessary to reach a compromise.

The Price Adjustment Process

• Together, demand and supply make a complete picture of the market.

•Price adjustments help a competitive market reach market equilibrium, with fairly equal supply and demand.

Figure 6.1bFigure 6.1b

The Price Adjustment Process

• The equilibrium price is the price at which supply meets demand.

Figure 6.2cFigure 6.2c

Economics 6-2

• Imagine that you want to go to a concert but you find it is sold out at ticket outlets.

• What effect will this shortage of tickets have on the price of any remaining concert tickets?

Economics 6-2

• Imagine that you want to go to a concert but you find it is sold out at ticket outlets. What effect will this shortage of tickets have on the price of any remaining concert tickets?

Their price will increase.

Economics 6-2

• U.S. soybean farmers had a record-high harvest in 1998.

•What likely effect did the increase in the supply of soybeans have on their price?

Economics 6-2

• What likely effect did the increase in the supply of soybeans have on their price?

the price of soybeans dropped dramatically.

Economics 6-2The Competitive Price Theory

• The theory of competitive pricing represents a set of ideal conditions and outcomes; it serves as a model to measure market performance.

•In theory, a competitive market allocates resources efficiently.

Economics 6-2The Competitive Price Theory

• To be competitive, sellers are forced to lower prices, which makes them find ways to keep

their costs down.

•Competition among buyers keeps prices from falling too far.

Economics 6-2

• Why do experts say that a market economy is one that “runs itself”?

Economics 6-2

• Why do experts say that a market economy is one that “runs itself”?

A market economy offers a climate where buyers and sellers set prices; there is no need for a government bureaucracy or planning commission.