When More Is Less Functions of Prices Economics LAP 12

Objectives A B Explain the importance of price. Explain how prices are determined. B

Explain the importance of price.

You are planning a surprise birthday party with limited cash. You want to buy food and decorations. There are no prices on anything in the grocery store.

What Is Price? The amount of money that is paid for a good, service, or resource The value placed on a good, service, or resource

How Much Will Consumers Pay? Three factors influence the price a consumer is willing to pay: Buying power Value Relative price

What Is Relative Price? One price compared to another The ratio between two prices

An Example of Relative Prices You have $20

How Consumers Use Relative Prices Whether prices go up or down, relative prices do not change if the ratio remains the same. By comparing relative prices, consumers choose the combinations that bring them the most satisfaction.

How Others Use Relative Prices Businesses compare the relative prices of different resources to determine which combination to use in production. Resource owners compare relative prices in different markets to determine where to sell their resources.

Using Relative Prices to Answer the 3 Economic Questions What will be produced? Products that are most profitable, sold at the highest prices the market will bear How will products be produced? At the lowest cost possible How will products be allocated? To whoever is willing and able to pay the price

Functions of Relative Prices Information Incentives Rationing Higher price = Lower quantity purchased Lower price = Higher quantity purchased

Explain how prices are determined. B

Impact of Supply and Demand As price increases, supply goes up. As price decreases, supply goes down. Demand: As price decreases, demand goes up. As price increases, demand goes down.

Supply and Demand Schedule for Gaming Consoles

The Equilibrium Price Also known as the market- clearing price The price at which the quantity that buyers want to buy is equal to the quantity that sellers are willing to sell Very rarely the price that exists in the marketplace

Excess Supply The quantities supplied are more than demanded. The price is set higher than the equilibrium price. A buyer’s market develops.

Excess Demand The quantities supplied are less than demanded. The price is set lower than the equilibrium price. A seller’s market develops.

The Substitution Effect Changes in relative prices cause buyers to substitute the purchase of one product for another. Whenever the demand price of a product changes, the relative prices of other products change. When the relative prices of other products change, consumers change the combination of products that they buy.

Market Price What is the market price? The actual price in a market at any particular time Excess supply or demand cause market price to fluctuate.

Think of five products or services you have recently purchased. If the prices went down, would you buy more? What is the maximum price you would pay for each? If the prices went above your maximum price, what would you buy instead?

A new drink is initially priced at $1.00 to gain market share. No indication that the price will rise in the future. Is it ethical to hook new customers? Should the company have to make it clear that the price is a promotion and/or that the price will rise? Would you continue to buy the product if the price increased?

Acknowledgments Original Developers: Christopher C. Burke, Aaron McMahon, MBA Research Version 2.0 Copyright © 2017 MBA Research and Curriculum Center

Digital-Based Photography Sources ThinkStock Photos Various images used in this presentation are ©2016 ThinkStock Photos. All rights reserved www.ThinkStockPhotos.com

Copyright All photographic digital images on this CD are owned by the aforementioned photographic resources or their licensors and are protected by the United States copyright laws, international treaty provisions, and applicable laws. No title to or intellectual property rights to the images on this CD are transferred to you. These sources retain all rights and are not to be used, digitally copied, transferred, or manipulated in any way. To do so is a violation of federal copyright laws.