Prices and Decision Making Section 1 – Prices as Signals Chapter 6 Prices and Decision Making Section 1 – Prices as Signals

The Price System… Where Supply and Demand Collide!

What are prices? The monetary value of a product as established by supply and demand a signal that helps us make economic decisions

Advantages of Prices Prices are neutral – they favor neither buyer nor seller The more competitive the market, the more accurate the price 2. Prices are flexible – they allow for market changes

3. Prices require no cost of administration – they gradually set themselves 4. Pricing is familiar – we’ve seen them all our lives

Allocations Without Prices Without prices, another system must be used to decide who gets what Saved for the government (communism) Rationing (“fair” share)

Problems with Fairness No one is happy with their share Cost – someone has to pay for printing and the work used to make the coupon No incentive for hard work

Prices as a System Helps individuals with choices Signals that help distribute resources between markets An informational network Rebate – a partial refund of a product used to promote a product

Trade-Offs (Alternative Choices) Your Own Thoughts: How do you feel about the current energy situation facing Americans? Using what you have learned so far in economics, do you think we should take advantage of the oil located in Canada? Be sure to discuss the following topics: Supply Demand Opportunity Costs Trade-Offs (Alternative Choices)

The Price System at Work Section 2 The Price System at Work

Price Adjustment Process Transactions in a market economy are voluntary because they are a compromise between the buyer and seller Think of a bargain between buyers and sellers at a store

Price Adjustment Process (cont.) Economic Model – a set of information listed as a table or graph to predict outcomes

Market Equilibrium The perfect price – when the demand and supply curves meet (prices are stable)

A Surplus When the quantity supplied is greater than the quantity demanded Equilibrium Price

A Shortage When the quantity demanded is greater than the quantity supplied Equilibrium Price

Explaining and Predicting Prices

Changes In Supply

Competitive Price Theory Markets only have to be reasonably competitive rather than perfect to be useful Sellers compete to meet consumer demands - forced to lower prices (encourages keeping costs down too). Competition among buyers helps prevent prices from falling too far.

What is a competitive market? How are prices determined in a competitive market? What do merchants usually do to sell items that are overstocked? What does this tell you about the equilibrium price for the product?

Social Goals vs. Market Efficiency Section 3 Social Goals vs. Market Efficiency

Distorting Market Incomes Price Ceiling– a maximum legal price that can be charged for a product

Distorting Market Incomes Price Floors – 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 May cause unemployment Raises poor people’s incomes

Price Ceilings and Floors

Agricultural Loan Supports U.S. government tried to stabilize agriculture Target Price – a price floor for farm products The Government also gave out loans to farmers that did not have a penalty or further obligation if not paid back

Price Controls: Our society has price controls to manage some equity even if it means losing some efficiency