Prices & Decision Making

Advantages of Prices Prices link producers and consumers prices in a competitive market economy favor neither the producer or consumer Prices are a result of competition between producers Prices in a market economy are flexible Major events can change prices New technology can change prices

Prices have no cost of administration Prices happen without outside help or interference Even when prices change, most people don’t notice because it is gradual.

Prices as a System As long as we have a pricing system we have a way to allocate resources We don’t have to ration or barter In a competitive market, we have a market equilibrium = situations where prices are relatively stable, and supply of goods and services is equal to the demand

Surplus = situation where the quantity supplied is greater than the quantity demanded Surplus turns up as unsold products on shelves and takes up space in suppliers warehouses Sellers then figure out their prices are too high and have to lower the price to get rid of the surplus

Shortage = a situation in which the quantity demanded is greater than the quantity supplied at a given price Producers have no more to sell and wish they had charged more for their product As a result, both price and quantity supplied will go up next time

Equilibrium price = the price that “clears the market” by leaving neither a surplus or shortage at the end of the trading period When price is too high, the surplus will tend to force it down When price is too low, the shortage tends to force it up As a result, the market tends to seek its own equilibrium.

Explaining and Predicting Prices Change in price is normally a result of a change in supply, a change in demand, or changes in both Changes in Supply: Example: agriculture experiences big swings in prices Weather can change the supply, and therefore the price

Changes in Demand: Changes in income, tastes, prices of related products, expectations, and number of consumers all affect demand for goods and services Example: gold prices have changed dramatically over the last 20 years 1980, rising prices, uncertain economic conditions, etc. created high demand for gold So gold producers opened closed mines and resumed production This increased the supply and drove the price of gold down