Brief Response: Use the Image, p. 128 Given other factors, is it worth producing….. explain 110 units? – Yes, – Marginal product is still high, total profit is high. 145 units? – Maybe, – Marginal is negative; profit is falling, but still possible.

Chapter 6: Prices and Decision Making

Section 1 p. Terms: Price 137 the monetary value of a product as established by supply and demand – Communicate information to buyers and sellers – Provide incentive to buyers and sellers What kind of economy uses supply and demand to set price? – Free-market (free-enterprise, market-economy)

Rationing 139 a system where an agency, most likely the government, decides how much each person is entitled to – Fair share Ration coupon A ticket prescribing how much a person’s ration is and when they can have it.

Rebate 140 a partial refund of the original price of a product. Usually from the maker Consumer must mail in a certificate with a receipt

Section 2 Terms: Economic model 143 a set of assumptions that can be – listed in a table – Illustrated with a graph – Stated algebraically Helps to – Analyze behavior – Analyze outcome

Market equilibrium 143 when prices are – relatively stable – Goods/services supplied equally to demand – EC: Is the US at a reasonable market equilibrium? Explain – Yes. Prices are stable. Employment is returning to it’s pre-recession point (meaning business has work); 4% – Goods are services are being sold (clearing the market) and new goods and services are being produced.

Surplus 144 a situation in which the quantity supplied is greater than the quantity demanded

shortage 144 situation in which quantity demanded is greater than quantity supplied

Equilibrium price 145 the price where there is neither a surplus or a shortage at the end of a trading period. “clears the market”

Section 3, Terms: Price ceiling 151 a maximum legal price that can be charged for a product Done for a social goal to help lower and fixed income people – Rent control

Minimum wage 152 The lowest legal wage that can be paid to most workers Price floor 152 The lowest legal price that can be paid for a good or service Reminder: minimum wage is a price floor; helps people by insuring income they can make a basic living.

Target price 153 A price floor for farm products Government will help farmers two ways – Target prices – Loan supports

Nonrecourse loan 153 a loan that carries neither a penalty nor further obligation to repay if not paid back A farmer could get at least the target price for his/her crops – Given to farmers by the CCC (Commodity Credit Corporation) of the US Government in the 1930s. – Involved the farmer Borrowing money at the target price Pledging his/her crops as security (collateral) in return – Farmer sold crops and kept any profits, paying back loan – Or farmer kept money from loan, paid government with crops

Deficiency payment 153 a check sent to producers that makes up for the difference in the actual market price and the target price – If the target price is higher than the market price

Hwk Assessments, Class Work, to Know

Assessment, CH 6, S1 1 Consumers weigh the price against their need Consumers will purchase – less at a high price – More at a low price

CH 6, S1 3 High prices – Producers produce more – Consumers buy less Low prices: – Producers produce less – Consumers buy more

CH 6, S1 4 Neutrality Flexibility Lack of administrative costs familiarity

CH 6, S1 5 Unfair system of allocation High cost of administering the system Employees/producers will want to work less

Assessments: CH 6, S2 1 Changes that affect demand and, therefore, price. – Income – Taste

CH 6, S2 3 Prices are adjusted through – Competition between buyers and sellers

CH 6, S2 4 They show how markets work by helping – Analyze behavior – Predicting outcomes

CH 6, S2 5 The more elastic, the smaller the price change The less elastic, the larger the price change

Assessments: CH 6, S3 1 To achieve equity and security

CH 6, S3 3 Shortages result if – Prices are set below equilibrium Surpluses result if – Prices are set above equilibrium

LA and drought (7) (use your paper if there’s room) In your opinion, is the price of water in Los Angeles high or low? (water is a public utility) The price of water is low, that way all people can afford water. Why do you think that is? What will raising water prices cause during the drought? (think what you were taught about price equilibrium) What users are targeted on the proposed chart? Explain. What users are protected on the proposed chart? Explain.

LA and drought (7) (use your paper if there’s room) In your opinion, is the price of water in Los Angeles high or low? (water is a public utility) – The price of water is low, most people can afford water Why do you think that is? – Prices are kept low so lower income people can afford access to the utility (water is a daily necessity). What will raising water prices cause during the drought? (think what you were taught about price equilibrium) – People will use less water (they will be forced to use less) What users are targeted on the proposed chart? Explain. – Big users (probably businesses), they use the most water. What users are protected on the proposed chart? Explain. – Small users, They use little water, mostly for necessities (survival)

CH 6, S3 4 Loan supports allow farmers to borrow against crops. Deficiency payments supply farmers with checks for the difference between the target price and the actual price.

CH 6, S3 5 The significant movement of prices, signals the collective decisions – Whether up or down

Image, p. 138 Questions Tokyo, Japan Answer should reflect knowledge of price allocation: – Access/resources/supply – Market/demand – Production – Currency values

Image, p. 143 Question $15 + so how is the equilibrium point identified on the Schedule? – Surplus/shortage = 0 Curve? – Supply and demand curves intersect

Images, p. 145 Question No one is sure what the equilibrium price for a new product will be – They estimate on the first day, – Then adjust the price

Images, p. 146 Question It shows a smaller range of price fluctuations The curve tends to be more horizontal + in the left example, why might demand be inelastic? – There are no substitutes – The purchase cannot be delayed + in the right example, why might demand be elastic? – There are substitutes – The purchase can be delayed

Other price motivations….. Handout. Why is his product so expensive? (5) How does he keep his costs down? What does he do when nobody buys his lemonade product? Who has the role of the government in this cartoon? Why do you say that?

Other price motivations….. Why is his product so expensive? (5) – Pay stockholders their dividends – Pay executives their exorbitant salaries and benefits – Pay the workers their wages and benefits – Overhead – Production costs How does he keep his costs down? – Using the cheapest methods What does he do when nobody buys his lemonade product? – Demands a subsidy from the government Who has the role of the government in this cartoon? – His mother – He asks her for a subsidy

Question Bad news – War – Disaster – Possible recession Should the price of gold be high, presently? Explain. – Current price of gold, 11/5: – $1395/oz. US and global recession Images, p. 147

Image, p. 153 Question Problems regarding – Fairness – High administrative costs – Diminished incentives to work and produce – Large surpluses

Question Loan program: – Farmer received $40,000 as a loan at the beginning of the season Deficiency payment program: – Farmer received $40,000 from selling crops and a payment to make up the difference. Image, p. 154

Brief Response Would you describe the present US economy as being at a reasonable market equilibrium point? Explain. (2)