1. Prices and Decision Making Section 1 – Prices as Signals
Chapter 6
Prices and Decision Making
Section 1 – Prices as Signals

2. The Price System…
Where Supply and Demand Collide!

3. What are prices?
The monetary value of a product as established by supply and demand
a signal that helps us make economic decisions

4. Advantages of Prices
Prices are neutral – they favor neither buyer nor seller
The more competitive the market, the more accurate the price
2. Prices are flexible – they allow for market changes

5. 3. Prices require no cost of administration – they gradually set themselves
4. Pricing is familiar – we’ve seen them all our lives

6. Allocations Without Prices
Without prices, another system must be used to decide who gets what
Saved for the government (communism)
Rationing (“fair” share)

7. Problems with Fairness
No one is happy with their share
Cost – someone has to pay for printing and the work used to make the coupon
No incentive for hard work

8. Prices as a System Helps individuals with choices
Signals that help distribute resources between markets
An informational network
Rebate – a partial refund of a product used to promote a product

9. Trade-Offs (Alternative Choices)
Your Own Thoughts:
How do you feel about the current energy situation facing Americans? Using what you have learned so far in economics, do you think we should take advantage of the oil located in Canada? Be sure to discuss the following topics:
Supply
Demand
Opportunity Costs
Trade-Offs (Alternative Choices)

10. The Price System at Work
Section 2
The Price System at Work

11. Price Adjustment Process
Transactions in a market economy are voluntary because they are a compromise between the buyer and seller
Think of a bargain between buyers and sellers at a store

12. Price Adjustment Process (cont.)
Economic Model – a set of information listed as a table or graph to predict outcomes

13. Market Equilibrium
The perfect price – when the demand and supply curves meet (prices are stable)

14. A Surplus
When the quantity supplied is greater than the quantity demanded
Equilibrium Price

15. A Shortage
When the quantity demanded is greater than the quantity supplied
Equilibrium Price

16. Explaining and Predicting Prices

17. Changes In Supply

18. Competitive Price Theory
Markets only have to be reasonably competitive rather than perfect to be useful
Sellers compete to meet consumer demands - forced to lower prices (encourages keeping costs down too).
Competition among buyers helps prevent prices from falling too far.

19. What is a competitive market?
How are prices determined in a competitive market?
What do merchants usually do to sell items that are overstocked? What does this tell you about the equilibrium price for the product?

20. Social Goals vs. Market Efficiency
Section 3
Social Goals vs. Market Efficiency

21. Distorting Market Incomes
Price Ceiling– a maximum legal price that can be charged for a product

22. Distorting Market Incomes
Price Floors – the lowest legal price that can be paid for a good or service
*Minimum Wage – the lowest legal wage that can be paid to most workers
May cause unemployment
Raises poor people’s incomes

23. Price Ceilings and Floors

24. Agricultural Loan Supports
U.S. government tried to stabilize agriculture
Target Price – a price floor for farm products
The Government also gave out loans to farmers that did not have a penalty or further obligation if not paid back

25. Price Controls:
Our society has price controls to manage some equity even if it means losing some efficiency