Student Web Activity Visit the Economics: Principles and Practices Web site at and click on Chapter 6—Student Web Activities for a price comparison activity.

the supply. Whenever economic conditions or political instability threatens, people tend to increase their demand for gold and drive the price up. Whenever the supply of gold increases dramati-cally-as when a major holder of gold like the Bank of England sells half of its gold holdings-the supply of gold increases, driving the price down.

The Competitive Price Theory

The theory of competitive pricing represents a set of ideal conditions and outcomes. The theory is important because it serves as a model by which to measure the performance of other, less competitive market structures. Even so, many markets come reasonably close to the ideal.

The prices of some foods such as milk, flour, bread, and many other items in your community will be relatively similar from one store to the next. When the prices of these items vary, it may be because advertisers have convinced some people that its brand is slightly better than others. Another reason may be that buyers are not well informed. The price of gasoline, for example, is usually higher at stations near an expressway because gas station owners know that travelers do not know the location of lower cost stations in an unfamiliar area.

Fortunately, markets only have to be reasonably competitive-rather than perfect-to be useful. The great advantage of competitive markets is that they allocate resources efficiently. As sellers compete to meet consumer demands, they are forced to lower the price of their goods, which in turn encourages them to keep their costs down. At the same time, competition among buyers helps prevent prices from falling too far.

In the final analysis, the market economy is one that "runs itself." There is no need for a bureaucracy, planning commission, or other agency to set prices because the market tends to find its own equilibrium. In addition, the three basic economic questions of WHAT, HOW, and FOR WHOM to produce are decided by the participants-the buyers and sellers—in the market.

Section 2 Assessment

Checking for Understanding

1. Main Idea Explain how a change in demand can affect prices.

2. Key Terms Define economic model, market equilibrium, surplus, shortage, equilibrium price.

3. Describe how prices are determined in a competitive market.

4. Explain why economic models are useful.

5. Explain how different cases of demand and supply elasticity are related to price changes.

Applying Economic Concepts

6. Equilibrium Price Choose one good or service—for example, unleaded gasoline, a gallon of milk, a local newspaper, or a haircut. Visit at least five stores that sell the product, and note its price at each location. What do the individual prices tell you about the equilibrium price for the good or service?

•Critical Thinking -

7. Understanding Cause and Effect What signal does a high price send to buyers and sellers?

8. Making Inferences What do merchants usually do to sell items that are overstocked? What does this tell you about the equilibrium price for the product?

Practice and assess key social studies skills with the Glencoe Skillbuilder Interactive Workbook, Level 2.



Synthesizing Information

Synthesizing information involves integrating information from two or more sources. The ability to synthesize, or combine, information is important because information gained from one source often sheds new light upon other information.

Learning the Skill

To synthesize information, follow these steps:

• Analyze each source separately to understand its meaning.

• Determine what information each source adds to the subject.

• Identify points of agreement and disagreement between the sources. Ask: Can Source A give me new information or new ways of thinking about Source B?

• Find relationships between the information in the sources.

Practicing the Skill

Study the sources below, then answer the questions that follow.

Source A

A common decision consumers make is whether to borrow money for a new car, or to pay cash for a less expensive used one. Studies show that more than 80 percent of all new cars sold in any given year in the United States are financed. There are advantages to owning a new car, but there are also significant costs consumers should keep in mind when they make this decision.

The interest a consumer pays on a new car loan is a significant part of its cost. Insuring a new car costs more than insuring a used car because new cars are more likely to be stolen or vandalized. In addition, there is a higher sales tax to pay for a more costly new car.

Because people have limited resources, most people have to borrow to buy a car.

Source B

Most Americans are accustomed to borrowing and buying on credit. At times, especially when buying such expensive consumer durables as automobiles and fine fu rnitu re, they consider borrowing to be necessary.

In a sense, people feel forced to buy items on credit because they believe they need them immediately. They do not want to wait. Of course, consumers are not really "forced" to buy most goods and services on credit. They could decide instead to save the money needed to make their purchases.

1. What is the main subject of each excerpt?

2. What kind of information does Source A add to this subject?

3. What kind of information does Source B add to this subject?

4. Does Source B support or contradict Source A? Explain.

5. Summarize what you have learned from both sources.

Application Activity

Find two sources of information on a topic dealing with the price of goods. Write a short report answering these questions: What are the main ideas in the sources? How does each source add to your understanding of the topic? Do the sources support or contradict each other?

qc. Practice and assess key social studies skills with the Glencoe Skillbuilder Interactive Workbook, Level 2.


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