Prices and Decision Making Chapter 6

Goals & Objectives 1.Prices as Signals in the marketplace. 2.Prices & allocation of resources. 3.Scarcity without prices: Communism 4.Prices in competitive markets. 5.Price changes and influencing factors. 6.Elasticity and price changes. 7.Fixed prices and market shortages. 8.Loan supports, deficiency payments, target prices: Gov’t involvement.

Prices as Signals in the Market Monetary value of a product established by supply and demand in the marketplace. Monetary value of a product established by supply and demand in the marketplace. 1. Subsidies effects: 2. Entitlement effects: 3. Regulation effects: 4. Monopoly effects: Provide examples for each.

Dairy Subsidies

Advantages of Prices 1.Serve as a link between Consumers and Producers.  Prices determine: What, How, and For Whom to Produce

Gov’t Regulation & Gas Prices

Advantages of Prices 2. Prices are neutral (Competitive Market). 2. Prices are neutral (Competitive Market). They favor neither the producer or consumer They favor neither the producer or consumer Willing seller & a willing buyer Willing seller & a willing buyer Explain how government subsidies affect prices in the short and long run. Explain how government subsidies affect prices in the short and long run.

Subsidies & Iron Triangles

Advantages of Prices 3. Prices are flexible (Market Economy) 3. Prices are flexible (Market Economy) Explain how government regulations affect flexible prices: Fads, Fashions, trends Natural Disasters, profit motives Explain how government regulations affect flexible prices: Fads, Fashions, trends Natural Disasters, profit motives

Price Gouging Laws & Shortages

Advantages of Prices 4. Prices have no administrative costs or tax base needs from the marketplace 4. Prices have no administrative costs or tax base needs from the marketplace Fewer Gov ’ t employees to determine: What, How and For Whom To Produce Fewer Gov ’ t employees to determine: What, How and For Whom To Produce Example: Social Security, Welfare, Food Stamps, Regulation of Indian Affairs, etc… Example: Social Security, Welfare, Food Stamps, Regulation of Indian Affairs, etc…

Taxes are Administrative Costs

Advantages of Prices 5. Prices are familiar and easily understood by most 5. Prices are familiar and easily understood by most 1. Minimum wage requirements and price offsets. Explain: Price-Wage Spiral. 2. Obamacare and market-prices? 3. Oil & gasoline prices and government regulation?

Health Insurance Regulation

Allocations without Prices 1. Without prices; Who decides who gets what, how and for whom to produce? Government allocates, rations, redistributes wealth by answering the For Whom To Produce question. 1. rationing coupon: Food Stamps 1. rationing coupon: Food Stamps Government deciding “ everyones fair share ” Government deciding “ everyones fair share ”

Wealth Redistribution by Rationing

The Problem of Fairness  1. High Administrative Costs: Bureaucracy and Taxes  2. Diminished Incentive: Why be productive if your needs are provided for by taxpayers. (Unemployment Compensation Insurance, Welfare, Food Stamps, Housing, Obamacare)

Unemployment & Diminished Incentive

Prices as a System Prices serve as signals. Prices serve as signals. 1. Higher oil prices in the 1970 ’ s led to:1. Higher oil prices in the 1970 ’ s led to: A. smaller automobiles more fuel efficient A. smaller automobiles more fuel efficient B. Carpooling to work B. Carpooling to work C. New technology in the auto industry C. New technology in the auto industry 2. Lower oil prices in the 1990’s led to a booming consumer economy. Why?2. Lower oil prices in the 1990’s led to a booming consumer economy. Why? 3. How would cheap gasoline affect green energy prices and demand for green energy products?3. How would cheap gasoline affect green energy prices and demand for green energy products?

Rebates What is a rebate? What is a rebate? A partial refund of the original price.A partial refund of the original price. Why offer? Competitive advantage over smaller retailer/whole-sellers.Why offer? Competitive advantage over smaller retailer/whole-sellers. Who Benefits? Consumer and Retailer.Who Benefits? Consumer and Retailer.

Milton Friedman Capitalism and Freedom Capitalism and Freedom 1. Agricultural subsidies? 1. Agricultural subsidies? 2. Price controls? 2. Price controls? 3. Minimum Wage Requirements? 3. Minimum Wage Requirements? 4. Federal Reserve System? 4. Federal Reserve System?

The Price System at Work Market Equilibrium: Market Price Market Equilibrium: Market Price Supply and Demand curve cross. Supply and Demand curve cross. 1. Surplus: quantity supplied is greater than the quantity demanded JIC Theory 1. Surplus: quantity supplied is greater than the quantity demanded JIC Theory 2. Shortage: quantity supplied is less than the quantity demanded. JIT Theory 2. Shortage: quantity supplied is less than the quantity demanded. JIT Theory

Surplus & Shortage

Explaining Market Prices Causes in Supply Change: Expectations Causes in Supply Change: Expectations Causes in Demand Change: Fads, Trends Causes in Demand Change: Fads, Trends A Competitive Price Theory: the market runs itself without gov’t interference. A Competitive Price Theory: the market runs itself without gov’t interference.

Distorting Market Outcomes Social Goals: Gov’t setting prices at “socially desirable” levels. Social Goals: Gov’t setting prices at “socially desirable” levels. Marketplace Effects of Social Goals: Marketplace Effects of Social Goals: 1. Medicaid: 50% doctors do not accept; Trillion dollars in Tax Revenue 2. Medicare: Govt decides who gets care; Trillion dollars in Tax Revenue 3. Obamacare: Govt decides who gets care; Shortage of suppliers 4. Food Stamps: Inflation of food prices. 5. HUD or Fannie Mae or Freddie Mac: Housing bubble & burst; deflation of housing prices; increased foreclosures.

Medicaid & Costs

Medicare Costs

Food Stamps & Costs

Social Goals vs. Market Efficiency Government goals of: Full Employment, Price Stability, Economic Growth Government goals of: Full Employment, Price Stability, Economic Growth Are in competition with: Profit Motives, Economic Freedom, Economic Efficiency Are in competition with: Profit Motives, Economic Freedom, Economic Efficiency Price ceilings and Price floors: Price ceilings and Price floors:

Price Ceilings & Shortages

Price Ceilings Rent Control: Some people can not afford rent = Gov ’ t Rent controls = Lessened quality of available rental units = Gov ’ t Regulations on rent quality = Lessened number of available units for rent = Government built rental units! Rent Control: Some people can not afford rent = Gov ’ t Rent controls = Lessened quality of available rental units = Gov ’ t Regulations on rent quality = Lessened number of available units for rent = Government built rental units! Gov’t caused Shortages Gov’t caused Shortages

Price Floors Some people make too little money = Government minimum wage requirement = lessened productivity = expensive workers = more unemployed persons = need for Welfare, Food Stamps, Unemployment Compensation Some people make too little money = Government minimum wage requirement = lessened productivity = expensive workers = more unemployed persons = need for Welfare, Food Stamps, Unemployment Compensation Gov’t caused: Unemployment or Labor Shortages Gov’t caused: Unemployment or Labor Shortages

Agricultural Price Supports Commodity Credit Corporation 1930; Today’s Department of Agriculture: Commodity Credit Corporation 1930; Today’s Department of Agriculture: Loan Supports: Nonrecourse loan: Loan Supports: Nonrecourse loan: Effects: Surplus of Food owned by Gov’t Effects: Surplus of Food owned by Gov’t Deficiency Payments: Gov’t subsidy for prices under target prices or profits Deficiency Payments: Gov’t subsidy for prices under target prices or profits Target Prices: Govt established wages/profits for farmers. Target Prices: Govt established wages/profits for farmers.

Subsidys, Surpluses, Shortages

Loan Supports Farmers receive government loans to grow certain crops for a guaranteed price to the government in return. Farmers receive government loans to grow certain crops for a guaranteed price to the government in return. Peanuts!!! Cotton!!! Peanuts!!! Cotton!!!

Deficiency Payments Result of CCC: Huge surpluses of peanuts and cotton Result of CCC: Huge surpluses of peanuts and cotton Government sells product in market below market price. Long term affects of low prices equals fewer suppliers. Example: Dairy or Milk producers Government sells product in market below market price. Long term affects of low prices equals fewer suppliers. Example: Dairy or Milk producers Government allows farmer to sell product and receive an additional payment for lost profits. Government allows farmer to sell product and receive an additional payment for lost profits.

Reforming Price Supports FAIR– : Federal Agricultural Improvement and Reform: FAIR– : Federal Agricultural Improvement and Reform: 1. Winners: Big Corporate Agricultural Industry 2. Losers: Private farms and family farms. Gov’t caused surpluses in short run. Gov’t caused shortages in the long run. Gov’t created monopolies.