2/2 Lead off Do you plan on voting in the upcoming election? Why or why not?

The Price System

I. Prices A.Prices as Signals 1.High prices – tell producers to produce more and buyers to buy less 2.Low prices – tell producers to produce less and buyers to buy more B.Prices as a system 1.Advantages of prices Prices are neutral – they don’t favor buyer or seller Prices are flexible – they can change quickly No administration cost – it doesn’t have to cost anything to assign a price to a product Easy to understand – everyone knows what the price means 2.Disadvantages of rationing or other systems

I. Prices A.Prices as Signals 1.High prices – tell producers to produce more and buyers to buy less 2.Low prices – tell producers to produce less and buyers to buy more B.Prices as a system 1.Advantages of prices 2.Disadvantages of rationing or other systems Problems with fairness – who decides the FOR WHOM question? High administrative cost – the decision makers take up resources without producing anything Diminished incentive to work or innovate– if products are distributed at the whim of the government, why try to work harder to produce more?

C.The Price System at Work 1.Market equilibrium – condition in which quantity supplied equals quantity demanded (all demand satisfied, all supply purchased) 2.Surplus Condition in which quantity supplied is greater than quantity demanded (too much product, not enough buyers) Price is too high 3.Shortage Condition in which quantity demanded is greater than quantity supplied (too many buyers, not enough product) Price is too low 4.Equilibrium price Price at which market equilibrium is reached Price will reach equilibrium on its own (without the government)

Surplus Price Quantity $ 7 QD - 90QS S1 D1

Shortage Price Quantity $ 3 QS - 95QD S1 D1

Market Equilibrium Price Quantity $ 5 QS=QD 100 S1 D1

D.Changes in Supply and Demand – a change in supply or demand will change equilibrium price and quantity 1.Supply Increase (right) – Price will decrease, quantity will increase Decrease (left) - Price will increase, quantity will decrease 2.Demand Increase (right) – Price will increase, quantity will increase Decrease (left) – Price will decrease, quantity will decrease

Market Equilibrium Price Quantity $ 5 QS=QD 100 S1 D1 A better cupcake oven is invented

Increase in supply Price Quantity $ 5 QD 100 S1 D1 S2 QS 120 Quantity supplied is now greater than quantity demanded (surplus)

Increase in supply Price Quantity $ 5 S1 D1 S2 When the producer lowers his price, equilibrium is reached $ 3 QS =QD

Market Equilibrium Price Quantity $ 5 QS=QD 100 S1 D1 Business taxes increase

Decrease in supply Price Quantity $ 5 QD 100 S1 D1 S2 QS 80 Quantity demanded is now greater than quantity supplied (shortage)

Decrease in supply Price Quantity $ S1 D1 S2 QS=QD 80 $ 8 When the producer raises his price, equilibrium is reached

Market Equilibrium Price Quantity $ 5 QS=QD 100 S1 D1 Lebron James says that he eats cupcakes before every game on Twitter

Increase in Demand Price Quantity $ 5 QS 100 S1 D1 QD 125 Quantity demanded is now greater than quantity supplied (shortage) D2

Increase in Demand Price Quantity $ 5 S1 D1 QS=QD 110 D2 $ 8 When the producer raises his price, equilibrium is reached

Market Equilibrium Price Quantity $ 5 QS=QD 100 S1 D1 An increase in personal taxes is passed

Decrease in Demand Price Quantity $ 5 QS 100 S1 D1 QD 50 Quantity supplied is now greater than quantity demanded (surplus) D2

Decrease in Demand Price Quantity $ 5 S1 D1 QD=QD 75 D2 $ 3 When the producer lowers his price, equilibrium is reached

E.The role of elasticity 1.If demand is inelastic, a change in supply will result in a large change in price 2.If demand is elastic, a change in supply will result in a small change in price

Practice Determine the effect of each on supply or demand of IPods Draw a new curve representing the change Determine the effect on equilibrium price 1.Business taxes are lowered 2.A law is passed requiring electronic devices be made of recycled material 3.Income level rises 4.A better music player is invented 5.ITunes lowers the prices of all the songs, videos, etc. 6.Price of computer chips decreases 7.The price of IPods is expected to decrease 8.Apple moves production operations overseas 9.Its Christmas! 10.Massive unemployment rates

Lead off 2/5/14 Do you think there should be laws against businesses (ex: gas stations) raising prices during an emergency (price gouging)? Why or why not? Do you think minimum wage should be raised? Why or why not?

II. Government Intervention and Market Distortion A.Social goals vs. Efficiency 1.In a market economy the following goals will be reached through the process of price adjustment without any help Freedom Full employment Efficiency Price stability Economic growth 2.Security and equity will sometimes be attempted through government intervention(laws and programs) Interventions will negatively effect efficiency Societies must determine if the cost in efficiency is worth the goal

B.Price Ceilings 1.In the name of security or equity, equilibrium price is deemed too high 2.A law is passed setting a maximum legal price 3.The result will be a ____________ 4.Examples: rent control, price gouging laws C.Price Floors 1.In the name of security or equity, equilibrium price is deemed too low 2.A law is passed setting a minimum legal price 3.The result will be a __________ 4.Example: minimum wage

Price Ceiling Price Quantity $ S1 D1 If the market price of gas is $2.50 and a $2 price ceiling was enacted on gasoline, then a shortage of gasoline would be the result Millions of gallons

Price floor Price Quantity $ 8 S1 D Thousands of workers If a $8 minimum wage is enacted, then a surplus of workers would be the result

D.Agricultural Price Supports 1.Goal: economic security for farmers 2.Loan Supports – farmers borrow money to operate farm at a target price and then “sell” the surplus to government 3.Deficiency payments – farmers are paid the difference between equilibrium price and target price 4.Opportunity Cost for price supports Surplus crops (loan supports) Unused resources (deficiency payments) Cost to taxpayers for both