Prices and Decision Making

Price as Signals  We have many signals that tell us what to do in life. In economics, price is that signal. It communicates information and incentives to buyers and sellers. -High prices tell producers to make more and consumers buy less. -Low prices tell producers to make less and consumers buy more. -Price is a link between producers and consumers. (answers What? How? For whom?) -Prices in a competitive market economy are neutral. Explain why. -It represents compromises between producer and consumer and what they are both willing to do. -Prices in a market economy are flexible. What might affect the price of an item? -based on events such as natural disasters, buyers and sellers adjust accordingly. -market economies adjust to these sort of events.

 Price flexibility accommodates change. Example: computers over time  Competitive markets get their prices from the market, not committees or administrators.  Prices make it easy for consumers to decide if they want something.

Allocation Without Prices  Command economies allocate products without prices. Connections determine who gets products.  Tickets are typically given to communist party members and not the average people  Rationing is also used, particularly during war times; it can lead to problems. Most people are not satisfied with their share.  Have to pay people to make, manage, and distribute rationing coupons. Some people will steal or make counterfeit coupons.  Less incentive to work and produce

Price as a System  Economists favor the price system;  How would higher oil prices affect a consumer? Car manufacturing?  Some automakers offered rebates on cars.

1. Market Equilibrium prices are relatively stable, another quantity of goods or services supplied is equal to the quantity demand. 2. Surplus quantity supplied is greater than the quantity demand. 3. Shortage is a situation in which the quantity demand is greater than the quantity supply. 4. Equilibrium Price there is neither a surplus nor a shortage.

Supply and Demand Curve

Inelastic Demand (q1 = 4; q2 = 5) (p2 = 5; p1 = 10)

Elastic Demand (q1 = 5; q2 = 10) (p2 = 6; p1 = 7)

Competitive Price Theory  The prices of some foods and them foods themselves may be similar from one store to another. Varying prices may be that advertisers have convinced consumers that one item is slightly better than the other; -Buyers may not be well-informed. -Why might gasoline at gas stations close to the interstate be more expensive than other gas stations?  Markets must be reasonably competitive. When sellers compete, they must lower prices. Buyers must also compete for the items, which prevents prices from falling too far.  Who runs a market economy?  What? How? And For Whom to produce is decided by participants.

Create a product Each group will have 20 minutes to create and name a product. Each group will have to have a detailed description of your product which will include a picture and a description of its purpose or what it does. Each group will have to price their product and create a supply schedule for this product (Price and quantity supplied) Each group will have to have a sales pitch as far as why we need this product. No group should have more than 4 members. Each group will present their product and sales pitch to the class.