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Section 1: Prices and Decision Making Chapter Introduction Section 1: Prices and Decision Making Section 2: The Price System at Work Section 3: Social Goals and Market Efficiency Visual Summary Chapter Menu

Have you ever wondered why famous athletes and entertainers make millions of dollars each year? Imagine that you are one of these athletes or entertainers and will be interviewed on a major television program. Knowing that the interviewer will ask you why you make so much money, prepare a list of 5 to 10 reasons that explain why you are worth your salary. Read Chapter 6 to learn about how economic systems allocate goods and services. Chapter Intro 1

1. Markets exist when buyers and sellers interact, and market prices are set by the interaction of demand and supply. 2. Governments strive for a balance between the costs and benefits of their economic policies to promote economic stability and growth. Chapter Intro 2

Chapter Intro-End

Section Preview In this section, you will learn that prices act as signals that help us allocate scarce resources. Section 1-Preview

Content Vocabulary Academic Vocabulary price rationing ration coupon rebate Academic Vocabulary neutral criteria Section 1-Key Terms

Do you think eBay buyers and sellers arrive at the perfect price? A. Definitely B. Possibly C. Definitely not A B C Section 1

Prices as Signals Price is a signal, giving information to buyers and sellers. High prices—buyers buy less and producers produce more. Low prices—buyers buy more and producers produce less. Section 1

Advantages of Prices Prices help the economy run smoothly by providing a good way to allocate resources. Section 1

Advantages of Prices (cont.) Prices help consumers and producers make decisions on WHAT, HOW, and FOR WHOM: In a competitive market, prices are neutral. Prices in a market economy are flexible. The Global Economy & YOU Average Laptop Prices Section 1

Advantages of Prices (cont.) Prices are familiar and easy to understand. Prices have no cost of administration. The Global Economy & YOU Average Laptop Prices Section 1

Which of the following is a function of price? A. No administrative costs B. Represent compromise C. Easy to understand D. All of the above A B C D Section 1

Allocations Without Prices Rationing has disadvantages that are not present in the price system. Section 1

Allocations Without Prices (cont.) Without a price system, a rationing system might be used. Individuals receive a ration coupon to obtain a product. Section 1

Allocations Without Prices (cont.) Problems with rationing Difficult to allocate in fair way Administrative cost of rationing Negative incentive to produce Section 1

Does rationing have any advantages? A. Definitely B. Possibly C. Definitely not A B C Section 1

Prices as a System Prices connect all markets in an economy. Section 1

Prices as a System (cont.) Prices help individuals make decisions and serve as signals in allocating resources between markets. Higher oil prices have affected producer and consumer decisions. Oil is inelastic; higher costs leave individuals with less to spend. Section 1

Prices as a System (cont.) SUV sales dropped; manufacturers offered a rebate. Manufacturers reduced production, closed plants, laid off workers. Employees find jobs in new industries. Section 1

Prices as a System (cont.) The adjustment process was a natural and necessary shift of resources for a market economy. Profiles in Economics: Margaret (Meg) Whitman Section 1

Have you or anyone in your family ever experienced or taken advantage of this type of market shift? A. Yes B. No C. Not sure A B C Section 1

Section 1-End

Section Preview In this section, you will learn how economic models help us understand prices in competitive markets. Section 2-Preview

Content Vocabulary Academic Vocabulary economic model equilibrium price surplus shortage Academic Vocabulary voluntary fluctuates Section 2-Key Terms

Have you ever overpaid for a product or service? A. Yes, all the time B. Yes, a few times C. Never A B C Section 2

The Price Adjustment Process In a market economy, prices seek their own equilibrium. Section 2

The Price Adjustment Process (cont.) Transactions in a market economy are voluntary, so compromises between buyers and sellers must benefit both. An economic model is used to analyze behavior and predict outcomes. Section 2

The Price Adjustment Process (cont.) Supply and demand curves intersect to form the equilibrium price. A surplus is any unsold product on store shelves or in warehouses. Sellers lower prices to attract more buyers. Market Equilibrium Section 2

The Price Adjustment Process (cont.) A shortage exists when supply does not meet demand. Prices and quantities will go up to meet demand. Surpluses and Shortages Section 2

The Price Adjustment Process (cont.) When the equilibrium price is found, there is no shortage or surplus during the market period. Factors may come along to disturb the equilibrium price, then shortages and surpluses will appear again to find a new equilibrium level. Surpluses and Shortages Section 2

At the equilibrium price, which statement is true? A. A shortage exists. B. No factors can disturb the price. C. No surplus or shortage exists. A B C Section 2

Explaining and Predicting Prices Changes in supply and demand can result in changes in prices. Section 2

Explaining and Predicting Prices (cont.) A change in price is normally caused by A change in supply A change in demand A change in supply and demand Changes in Prices Section 2

Explaining and Predicting Prices (cont.) Predictions can be made if we know the elasticity of each curve and the underlying factors that cause the supply and demand curves to change. A competitive market is one that “runs itself,” finding its own equilibrium. Questions of WHAT, HOW, and FOR WHOM are decided by the buyers and sellers. Section 2

What is an advantage of competitive markets? A. Suppliers and buyers are forced to compromise. B. Rationing coupons are used. C. Resources are allocated efficiently. D. Competition in the market exists. A B C D Section 2

Section 2-End

Section Preview In this section, you will learn that governments sometimes use policies that interfere with the market in order to achieve social goals. Section 3-Preview

Content Vocabulary Academic Vocabulary price ceiling minimum wage price floor target price nonrecourse loan deficiency payment Academic Vocabulary arbitrarily stabilize Section 3-Key Terms

Do you think the increase in Federal Minimum Wage hurts or helps the economy? A. Helps B. Hurts C. Not sure A B C Section 3

Distorting Market Outcomes Price ceilings and price floors prevent prices from allocating goods and resources. Section 3

Distorting Market Outcomes (cont.) Sometimes the price system cannot accurately inform buyers and sellers in the market. Section 3

Distorting Market Outcomes (cont.) Price ceiling advantages Some individuals are happy. Individuals who could not afford the market price not may be eligible. Price Ceilings Section 3

Distorting Market Outcomes (cont.) Price ceiling disadvantages Demand becomes too high. Suppliers face lower profits. Suppliers limit service or leave market altogether. Price Ceilings Section 3

Distorting Market Outcomes (cont.) Price floor Minimum wage is an example. Price Floors Section 3

Which statement do you think is correct? A. Price ceilings have a negative affect on the allocation of resources. B. Price ceilings have positive factors that outweigh the negative affect on resources allocated. A B Section 3

Agricultural Price Supports Government programs to help stabilize prices for farmers have both positive and negative effects. Section 3

Agricultural Price Supports (cont.) During the Great Depression of the 1930s, farm prices fell much further than other prices in the economy. Federal government established the Commodity Credit Corporation (CCC) to help farmers. Section 3

Agricultural Price Supports (cont.) Under the CCC support programs A target price was established to help stabilize farm prices. Loan supports like the nonrecourse loan were available. Farmers received a deficiency payment. Deficiency Payments Section 3

Agricultural Price Supports (cont.) Agricultural output increased greatly over time, as did the number of farmers. Government wanted farmers to stop farming—the Conservation Reserve Program of 1985 pays farmers not to farm. Section 3

Agricultural Price Supports (cont.) Efforts to make farming responsive to the market forces of supply and demand continue today with the Farm Security and Rural Investment Act of 2002. Section 3

Which statement is true? A. American agriculture is more dependent than ever on subsidies and price supports. B. Acreage is set aside in land banks, and farmers are paid not to farm. C. Both A and B A B C Section 3

When Markets Talk Markets send signals when prices change in response to events. Section 3

When Markets Talk (cont.) Markets bring buyers and sellers together. Markets are said to “talk” when prices in them move up or down significantly in reaction to events that take place elsewhere in the economy. Stock markets, for example, react quickly to interest rate changes made by the Federal Reserve. Section 3

How quickly does the stock market react to changes in the economy? A. Can take several months to years B. Can take weeks to a few months C. In a manner of hours to a few days A B C Section 3

Section 3-End

Allocation of Resources Prices are signals that help buyers and sellers make economic decisions. Without prices, societies must find other ways to allocate resources. VS 1

Market Equilibrium When buyers and sellers can freely make production and purchase decisions, the price of a product will move toward market equilibrium. At this point, the quantity supplied is exactly equal to the quantity demanded. VS 2

Social Goals and Prices The social goals of equity and security sometimes can be achieved only by giving up parts of other goals. Price ceilings or price floors can help achieve these goals, but they may result in fewer goods and services offered overall. VS 3

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Margaret (Meg) Whitman (1956– ) ranked by Fortune magazine as the “Most Powerful Woman in Business” in 2005 turned eBay into one of the fastest-growing companies in U.S. history Profile

Select a transparency to view. Economic Concepts Transparencies Transparency 7 Markets and Prices Transparency 8 Supply and Demand Select a transparency to view. Concept Trans Menu

Concepts Trans 1

Concepts Trans 2

DFS Trans 1

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DFS Trans 3

price monetary value of a product as established by supply and demand Vocab1

rationing system of allocating goods and services without prices Vocab2

ration coupon permit allowing holder to receive a given amount of a rationed product Vocab3

rebate partial refund of a product’s original price Vocab4

neutral  favoring neither side in a dispute Vocab5

criteria a standard or rule on which judgment can be based Vocab6

economic model a simplified version of a complex behavior expressed in the form of an equation, graph, or illustration Vocab7

equilibrium price price where quantity supplied equals quantity demanded Vocab8

surplus situation where quantity supplied is greater than quantity demanded at a given price Vocab9

shortage situation where quantity supplied is less than quantity demanded at a given price Vocab10

voluntary done or brought about by free choice Vocab11

fluctuates changes continually and irregularly Vocab12

price ceiling highest legal price that can be charged for a product Vocab13

minimum wage lowest wage that can be paid to most workers Vocab14

price floor lowest legal price that can be paid for a product Vocab15

target price price floor for agricultural products set by the government to stabilize farm income Vocab16

nonrecourse loan agricultural loan that carries no penalty or further obligation if it is not paid Vocab17

deficiency payment cash payment making up the difference between the market price and the target price Vocab18

arbitrarily randomly or by chance Vocab19

stabilize to make steady or unwavering Vocab20

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