Economics 5/3/10 OBJECTIVE: Demonstration of Chapter#5 and begin examination of price. I. Administrative Stuff -attendance & distribution of test II. Chapter#5 Test III. Journal #18 pt.A -Read “Business Week Newsclip” p.126 -Answer questions (1-2) p.126 IV. Journal #18 pt.B -notes on prices V. Journal#18 pt.C Film: I Pencil NOTICE: No School Tomorrow

How is price determined? Price is determined by the intersection of supply & demand.

Prices as Signals Price – the monetary value of a product as established by supply & demand. Price is a signal that helps us make economic decisions. High prices are a signal for producers to produce more and consumers to buy less. Low prices are a signal for producers to produce less and consumers to buy more.

Advantages of Prices 1.) Prices in a competitive market favor neither the producer nor the consumer. 2.) Prices in a market economy are flexible. 3.) Prices have no administrative costs and answer the questions WHAT, HOW, and for WHOM to produce. 4.) You have known it your entire life.

Life without prices? Prices help allocate scarce resources, but what if there was no such thing as price? Rationing – the government determines everyone’s “fair” share. Problem with determining what is fair. High administrative stuff (cost, enforcement, etc) No incentive to work hard.

I Pencil

Questions on “I Pencil” 1.) What does Milton Friedman mean by saying there is nobody in the world who knows how to make a pencil? 2.) What kind of transaction makes a free market possible? 3.) What must be true for all parties in a voluntary transaction? 4.) What is the price system? 5.) What is the zero-sum game philosophy? 6.) What is meant by the invisible hand?

Economics 5/5/10 OBJECTIVE: Examine how change in demand can affect the prices of goods. I. Journal #19 pt.A - Read “Profiles in Economics” p.141 -Answer question #1 p.141 II. Quiz#11 III. Return of Chapter#5 Test IV. Journal#19 pt.B -notes on how inelastic & elastic demand effects prices V. Journal#19 pt.C -Questions on NBR

How is price determined? Price is determined by the intersection of the supply and demand curves.

Inelastic Demand v. Elastic Demand Figure 6.3a Figure 6.3b

Changes in Demand A change in demand, like a change in supply, can also affect the price of a good or service. All of the factors we examined in Chapter 4–changes in income, tastes, prices of related products, expectations, and the number of consumers–affect the market demand for goods and services.

Demand for Gold One example is the demand for gold. Figure 6.4 shows why gold prices have changed so dramatically over a 20-year period. Figure 6.4

Why Gold Prices Fell 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 dramatically–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. Price of gold 10/26/06: $ Price of gold 10/6/08: $ Price of gold 1/20/09: $ Price of gold 10/13/09: $

2 Year Gold Price

10 Year Gold

36 Year Gold

NBR – segments ) Why did farmers adjust their milk production following the holiday season of 1998? 2.) Why did Kodak cut jobs in 1999? 3.) What does leaner & meaner mean? 4.) What is the elasticity of vacation homes? 5.) What is the elasticity of prescription drugs?

Economics 5/6/10 OBJECTIVE: Examine the price system at work. I. Journal#20 pt.A -Read “The Global Economy” p.138 -Answer questions (1-2) p.138 II. Journal#20 pt.B -notes on the price system at work III. Mindjogger -video quiz on price NOTICE: Journals Due Tuesday!

Price Adjustment Process “Because transactions in a market economy are voluntary, the compromise that eventually takes place must be to the benefit of both parties, or the compromise would not occur in the first place.” p.142

Market Equilibrium When prices are relatively stable, and the quantity of goods and services supplied is equal to the quantity demanded.

Surplus & Shortage Surplus – a situation in which the quantity supplied is greater than the quantity demanded at a given price. Shortage – a situation in which the quantity demanded is greater than the quantity supplied at a given price.

The Price Adjustment Process

Explaining and Predicting Prices Economists use market models to explain how the world around us works and predict how certain events such as changes in prices might occur. A change in price is normally the result of a change in supply, a change in demand, or changes in both. Elasticity of demand is also important when predicting prices.

Inelastic Demand v. Elastic Demand Figure 6.3a Figure 6.3b

Economic goals The seven broad economic and social goals we examined in Chapter #2 often conflict with each other. This is why the government has been playing a larger role in the economy than someone like Adam Smith would have liked. One way the government tries to achieve equity and security is by setting prices at “socially desirable” levels. What does “socially desirable” mean?

Distorting Market Outcomes Price ceiling – a maximum legal price that can be charged for a product. Price ceilings can be found in places like NYC who put rent controls on housing in an attempt to make it affordable. Price floor – the lowest legal price that can be paid for a good or service. Minimum wage – the lowest legal wage that can be paid to most workers is an example of a price floor.

Rent control For example, without rent controls the equilibrium price for housing in NYC might be $900 per month. At this price, suppliers would be willing to provide 2 million units of housing. REMINDERS: Law of Demand – as price drops quantity demanded increases. Law of Supply – as price drops quantity supplied decreases. If NYC were to put a price ceiling of $600 per month on rent, what would happen to quantity demanded? What about quantity supplied? What is it called when quantity demanded exceeds quantity supplied?

Rent control in NYC

Federal Minimum Wage

Economics 5/7/10 OBJECTIVE: Examine the success of Wal-mart & its effect on the United States. I. Administrative Stuff -Attendance II. Quiz#12 III. Frontline:“Is Wal-mart Good for America?” -questions on film about Wal-mart NOTICE: Chapter#6 Test Monday! NOTICE: Journals Due Tuesday!