THE PRICE SYSTEM

WARM UP What’s the difference between price and cost?

THE PRICE SYSTEM The way the pricing system in a market economy works enables trades to happen, but also inhibits trades from happening Remember – for there to be a market, there has to be a willing buyer and a willing seller Can you think of examples of the above?

THE PRICE SYSTEM 1991 Jeep Cherokee, 200k miles Opportunity costs of the car? Value of the car vs. price KBB value of the car: $1500. but, a four wheel drive car with a left that can allow the jeep to move over rock fields – that’s gonna be harder – to replace that it will be so much money! If I owned this car and wastned to sell it, I’d need to sell it for a lot so that I can get a replacement car. But no one woul dbuy it for a lot. There’s no willing price point.

PRICE Price = the monetary value of a product as established by supply and demand How?

PRICE Prices act as signals What do high prices mean for Consumers? Producers?

PRICE Prices act as signals What do low prices mean for Consumers? Producers?

What would we have if we didn’t have a price system? Command system Bartering Rationing

RATIONING Is there a time in US History when we practiced rationing? Why? How did that work? Wealthy people

RATIONING: what are the pros and cons? Wealthy people Predict!

RATIONING: Pros Everyone gets something Wealthy people

RATIONING: Cons Everyone thinks their share is too small Wealthy people can obtain an unfair advantage Rich can buy and hoard and sell at higher prices Not everyone needs exactly the same thing Old woman who can’t drive vs. a Lyft driver Administrative costs It’s so expensive to figure all of that out and keep it organized! Incentive to produce? [ you need to employe an army of bureaucrats to veridy that everyone who is getting their ration coupons are. Rationing – that they’re not counterfietd, and etc. an army of gov employees to manage the system 0 and they all need to be paid.

THE PRICE SYSTEM

THE PRICE SYSTEM Is there anything in the world that doesn’t have a price? Ah ha! But happiness cannot be bought or sold – it’s not a good or service.

THE PRICE SYSTEM In our market economy, everything that is potentially tradable is for sale And, if it’s for sale, it has a price Determined by the intersection of supply and demand But, buyer and seller have to be willing… My friend’s aunt lives on a ranch in boulder, people ask her all the time if they can buy her house

THE PRICE SYSTEM Extremes of the market system? What would you do for… $1000? $100,000? $10,000,000? My friend’s aunt lives on a ranch in boulder, people ask her all the time if they can buy her house

CHARACTERISTICS OF THE PRICE SYSTEM

CHARACTERISTICS It’s neutral. It doesn’t favor suppliers over demanders It’s the result of competition between buyers and sellers Both sides are satisfied, or it wouldn’t happen

CHARACTERISTICS It’s flexible. It absorbs the ‘shocks’ Natural disasters, war, etc Gov’t can’t anticipate all needs – if there’s a sudden shortage, the curves will move to adjust When we don’t have enough stuff, the people who do get it, theoreticall yneed it the most, because they’re willing to give up more to get the thing (during a shortage, for example). People who have a desparate need for something get access to it. Scarce goods go to people who need it more

CHARACTERISTICS It’s efficient. Minimal waste – no need for a black market, like in rationing When we don’t have enough stuff, the people who do get it, theoreticall yneed it the most, because they’re willing to give up more to get the thing (during a shortage, for example). People who have a desparate need for something get access to it. Scarce goods go to people who need it more

CHARACTERISTICS It offers freedom and choices. In market systems, is too much a bad thing? Now, think about the flip side… Have you ever overpaid for something? How does it make you feel?

CHARACTERISTICS It has negligible administrative costs Price is naturally determined by sellers and buyers – not an army of bureaucrats

CHARACTERISTICS It’s fair…? Do you think our price system is fair? Why or why not? Share with a partner.