Chapter 6: Prices & Decision Making

Signals to Decision Making Price Monetary ($$$) value of a product as established by supply / demand High prices are signals for producers to produce more and for buyers to buy less. Low prices are signals for producers to produce less and for buyers to buy more help decide the three basic WHAT, HOW, and FOR WHOM questions all societies face

Advantages of Prices Neutral (favor neither the producer nor the consumer) Flexible (Unforeseen events such as natural disasters and war affect the prices of many items) Zero cost to administer (Competitive markets tend to find their own prices without outside help or interference) Well known (we’ve known of prices since we were little)

Allocating without prices Rationing system under which an agency such as government decides everyone’s “fair” share (people receive ration coupon) widely used during wartime

Problems with rationing Everyone feels that their share is too small High administrative costs to manage Diminishing incentive to work

Prices as a system The market for full-size automobiles was one of the first to feel the effects To move their inventories, some manufacturers began to offer a rebate: a partial refund of the original price of the product As time went on, however, the surplus of unsold cars remained. Automakers began reducing their production of large cars The result of higher prices in the international oil market, then, was a shift of productive resources out of the large car market into other markets

market equilibrium situation in which prices are relatively stable, and the quantity of goods or services supplied is equal to the quantity demanded

How do we find the Equilibrium? we have to examine the reactions of buyers and sellers to market prices

surplus quantity supplied is greater than the quantity demanded Surplus shows up as unsold products on suppliers’ shelves, and it begins to take up space in the suppliers’ warehouses

Surplus

shortage the quantity demanded is greater than the quantity supplied When a shortage happens, producers have no more products to sell, and they end the day wishing that they had charged higher prices for their products

Shortage…continued

equilibrium price price that “clears the market” by leaving neither a surplus nor a shortage Figure 6.2c

price ceiling maximum legal price that can be charged for a product

minimum wage lowest legal wage that can be paid to most workers

price floor lowest legal price that can be paid for a good or service

Ch. 7: Market Structures the nature and degree of competition among firms operating in the same industry.

Laissez-faire Gov’t should not interfere with commerce or trade

monopoly -is a market structure with only one seller of a particular product trusts – legally formed combinations of corporations or companies

price discrimination - the practice of charging customers different prices for the same product cease and desist order is an FTC ruling requiring a company to stop an unfair business practice public disclosure, requirement that businesses reveal information to the public