ChapterChapter

PricePrice6

Objectives: Students will learn…

How the market establishes an equilibrium priceHow the equilibrium price balances supply &

demandHow supply & demand models can be used to

determine the equilibrium price of a good or service.

Common ways in which governments may change free market pricing and some of the policy reasons for intervention.

What factors do you consider when

deciding whether to purchase an

item? Price is probably one of the

factors you think about. Low prices

may attract buyers, but they also

impact sellers. In a market economy,

prices are determined by supply and

demand.

PRICEPRICE

Signals:

Economic Indicators

Prices are

signals!

Market Forces

• Shortage—quantity demanded is greater than quantity supplied

• Rationing—limiting demand

• Surplus—quantity supplied is greater than quantity demanded.

• Equilibrium price—equal supply and demand (the price that clears the market)

What will happen to

the equilibrium price

if the demand for CDs

suddenly increases?