This document summarizes key aspects of prices and the price system from an economics textbook. It discusses the role and benefits of the price system in guiding supply and demand, and its limitations such as externalities and public goods. Market equilibrium occurs when supply and demand are balanced. Surpluses and shortages cause prices to change to restore equilibrium. Shifts in supply or demand also shift the equilibrium point. Governments sometimes set prices to address market limitations or for strategic reasons, establishing price floors, ceilings, and rationing, but this interferes with market forces.

1. Economics Ch. 5
Prices
5.1, 5.2, 5.3
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2. What is the role of the price
system?
• It guides producers and consumers to work together and
balance supply and demand by compromise.
• Answers the basic economic questions (ch. 2) in a free
enterprise market.
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3. What are the benefits of the
price system?
• It provides information, like prices of resources and goods
• incentives, gives people a reason to buy something (sale)
• choice, the price system increases the choices available of
product
• efficiency, key benefit in the price system, provides for the
wide use of resources and encourages efficiency by giving info
to the consumer and producer
• and
• Flexibility, the way the price system deals with the changes in
supply and demand.
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4. What are the limitations of the
price system?
• Externalities – the effect the market has on people that aren’t
directly connected to the consumption or production of
goods. May be good or bad.
• Public goods – a good or service that is consumed by all
members of a society or group. It is a limitation due to the
face that the price system fails to assign the cost of public
goods to all consumers. (the rich don’t pay enough taxes) (free
healthcare for any government official)
• Instability – due to drastic weather changes and other things
like worker protests, drastic price changes are made. Because
of this, small businesses can go out of business or a necessity
can become so overwhelmingly expensive that no one will be
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able to buy it.

5. What is market equilibrium?
• For science lovers, it is the homeostasis of demand and supply.
• For those who have no idea what I am talking about, it is a
situation where quantity demanded and quantity supplied are
at even levels with each other.
• On a graph, its where the lines of the demand curve and
supply curve intersect.
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6. How does the price system handle
product surpluses and shortages?
• Producers change prices and quantities of goods provided.
• When there is a surplus, the amount supplied exceeds the
amount consumed. It tells the producers the products they
are selling are overpriced.
• When there’s a shortage, it means there isn’t enough of the
product and it’s too cheap. If they raise the price, the product
will have less demand and will set the market at equilibrium.
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7. How do shifts in demand and
supply affect market equilibrium?
• On the graph, the equilibrium will shift along with the curves
of the demand and/or supply.
• The equilibrium will always move with supply and demand.
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8. Why do governments set
prices sometimes?
• To address the limitations of the price system.
• Governments can assign the cost of public goods, and
externalities.
• It also helps to keep the market functioning smoothly and
away from economic depressions.
• At times, like during world war 2, the government rationed
goods so we could send goods off to war for the army men.
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9. What do governments try to establish with
price floors, price ceilings and rationing?
• boundaries
• Price ceiling: the limit on how expensive a good can be. The
government establishes this because if they didn’t prices of
living would go up tremendously. For example, the price of
rent on apartments would go up if there was more demand
for them in a certain area, but since the city council
intervened, we are still able to afford living in them.
• Price floor: the limit how cheap a good can be. Ex: Minimum
wage.
• Rationing: the government tries to establish equality in the
amount of goods or supplies each consumer or producer will
be able to have. 9

10. What happens when
governments manage prices?
• The government interferes with the natural flow of supply and
demand which can cause imbalances and prevent markets
from reaching equilibrium.
• It stops people from raising the prices to make more profit
and in turn make more product or a better product.
• With rationing, critics say its unfair, costly and creates black
markets.
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11. Credits
• Picture:
• "Fundamentals of Business." Business. Changes in Market
Equilibrium. N.p., 2009. Web. 24 Aug. 2012.
<http://www.history-society.com/changes-in-market.html>.
• Info:
• Pennington, Robert Leroy. Holt Economics. Austin, Texas:
Holt, Rinehart and Winston, 2003. Print.
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