1. Splash Screen

2. Section 1: Prices and Decision Making
Chapter Introduction
Section 1: Prices and Decision Making
Section 2: The Price System at Work
Section 3: Social Goals and Market Efficiency
Visual Summary
Chapter Menu

3. Section Preview Section Objectives
In this section, you will learn that prices act as signals that help us allocate scarce resources.
Section Objectives
Students will be able to:
Identify and describe the advantages of price.
Describe how a system might provide goods and services without price, and how it works.
Describe how prices connect all markets in the economy.
Section 1-Preview

4. 1. Markets exist when buyers and sellers interact, and market prices are set by the interaction of demand and supply.
2. Governments strive for a balance between the costs and benefits of their economic policies to promote economic stability and growth.

5. Do you think eBay buyers and sellers arrive at the perfect price?
A. Definitely
B. Possibly
C. Definitely not A B C
Section 1

6. Prices as Signals
Price is a signal, giving information to buyers and sellers.
High prices—buyers buy less and producers produce more.
Low prices—buyers buy more and producers produce less.
Section 1

7. Advantages of Prices
Prices help the economy run smoothly by providing a good way to allocate resources.
Section 1

8. Advantages of Prices (cont.)
Prices help consumers and producers make decisions on WHAT, HOW, and FOR WHOM:
In a competitive market, prices are neutral.
Prices in a market economy are flexible.
Section 1

9. Advantages of Prices (cont.)
Prices are familiar and easy to understand.
Prices have no cost of administration.
The Global Economy & YOU Average Laptop Prices
Section 1

10. Allocations Without Prices
Rationing has disadvantages that are not present in the price system.
Section 1

11. Allocations Without Prices (cont.)
Without a price system, a rationing system might be used.
Individuals receive a ration coupon to obtain a product.
Section 1

12. Allocations Without Prices (cont.)
Problems with rationing
Difficult to allocate in fair way
Administrative cost of rationing
Negative incentive to produce
Section 1

13. Does rationing have any advantages? A. Definitely B. Possibly
C. Definitely not
Why?? A B C
Section 1

14. Prices as a System
Prices connect all markets in an economy.
Section 1

15. Prices as a System (cont.)
Prices help individuals make decisions and serve as signals in allocating resources between markets.
Higher oil prices have affected producer and consumer decisions.
Oil is inelastic; higher costs leave individuals with less to spend on other good or services. (Income Effect)
Section 1

16. Prices as a System (cont.)
-- Goods that go out of style, or become
unpopular end up on the clearance
racks at stores.
SUV sales dropped; manufacturers offered a rebate.
Manufacturers reduced production, closed plants, laid off workers.
Employees find jobs in new industries.
Section 1

17. Prices as a System (cont.)
The adjustment process was a natural and necessary shift of resources for a market economy.
Section 1

18. Section Objectives Students will be able to:
Identify and describe the advantages of price.
Describe how a system might provide goods and services without price, and how it works.
Describe how prices connect all markets in the economy.
Section 1-Preview

19. Section 1-End

20. Section Preview: Section Objectives:
In this section, you will learn how economic models help us understand prices in competitive markets.
Section Objectives:
Students will be able to:
Create a graph that identifies the equilibrium point.
Create a graph that identifies shortages and surpluses.
Describe how changes in supply and/or demand can result in a change in price.
Section 2-Preview

21. Have you ever overpaid for a product or service? A. Yes, all the time
B. Yes, a few times
C. Never A B C
Section 2

22. The Price Adjustment Process
In a market economy, prices seek their own equilibrium.
Section 2

23. The Price Adjustment Process (cont.)
Transactions in a market economy are voluntary, so compromises between buyers and sellers must benefit both.
An economic model is used to analyze behavior and predict outcomes.
Section 2

24. The Price Adjustment Process (cont.)
Supply and demand curves intersect to form the equilibrium price.
Market Equilibrium
Section 2

25. The Price Adjustment Process (cont.)
A shortage exists when supply does not meet demand.
Prices and quantities will go up to meet demand.
A surplus is any unsold product on store shelves or in warehouses.
Sellers lower prices to attract more buyers.
Surpluses and Shortages
Section 2

26. The Price Adjustment Process (cont.)
When the equilibrium price is found, there is no shortage or surplus during the market period.
Factors may come along to disturb the equilibrium price, then shortages and surpluses will appear again to find a new equilibrium level.
Surpluses and Shortages
Section 2

27. Explaining and Predicting Prices
Changes in supply and demand can result in changes in prices.
Section 2

28. Explaining and Predicting Prices (cont.)
A change in price is normally caused by
A change in supply
A change in demand
A change in supply and demand
Changes in Prices
Section 2

29. Explaining and Predicting Prices (cont.)
Changes in supply are caused by:
Cause Effect Result
Cost of resources C↑ S↓ Shift L
Productivity P↑ S↑ Shift R
Technology T↑ S↑ Shift R
Taxes T↑ S↓ Shift L
Expectations E↑ S↑ Shift R
Government regulations R↑ S↓ Shift L
Number of sellers #S↑ S↑ Shift R
Subsidy S↑ S↑ Shift R
Section 2

30. Explaining and Predicting Prices (cont.)
Changes in demand are caused by:
Cause Effect Result
Consumer income CI↑ D↑ R
Consumer tastes CT↑ D↑ R
Substitute goods SG↑ D↑ R
Complementary Goods CG↑ D↓ L
Expectations E↓ D↓ L
Number of consumers #C↓ D↓ L

31. Explaining and Predicting Prices (cont.)
Predictions can be made if we know the elasticity of each curve and the underlying factors that cause the supply and demand curves to change.
A competitive market is one that “runs itself,” finding its own equilibrium.
Questions of WHAT, HOW, and FOR WHOM are decided by the buyers and sellers.
Section 2

32. Section Objectives: Students will be able to:
Create a graph that identifies the equilibrium point.
Create a graph that identifies shortages and surpluses.
Describe how changes in supply and/or demand can result in a change in price.
Section 2-Preview

33. Section 2-End

34. Section Preview Section Objectives
In this section, you will learn that governments sometimes use policies that interfere with the market in order to achieve social goals.
Section Objectives
Students will be able to:
Identify, describe and give examples price ceilings and floors and how they distort the market.
Identify, describe and give examples of price supports.
Describe and give examples of how markets talk in response to world events.
Section 3-Preview

35. Do you think an increase in Minimum Wage hurts or helps the economy?
A. Helps
B. Hurts
Not sure
Why? A B C
Section 3

36. Distorting Market Outcomes
Price ceilings and price floors prevent prices from allocating goods and resources.
Section 3

37. Distorting Market Outcomes (cont.)
One common way to achieve social goals is to have government participation in the marketplace.
When this occurs, prices are not allowed to adjust to find new equilibriums.
Sometimes this leads the price system to inaccurately inform buyers and sellers in the market.
Section 3

38. Distorting Market Outcomes (cont.)
Price ceiling advantages
Some individuals are happy.
Individuals who could not afford the market price now may be eligible.
Price Ceilings
Section 3

39. Distorting Market Outcomes (cont.)
Price ceiling disadvantages
Demand becomes too high.
Suppliers face lower profits.
Suppliers limit service or leave market altogether.
Price Ceilings
Section 3

40. Distorting Market Outcomes (cont.)
Price floor
Minimum wage is an example.
Price Floors
Section 3

41. Agricultural Price Supports
Government programs to help stabilize prices for farmers have both positive and negative effects.
Section 3

42. Agricultural Price Supports (cont.)
During the Great Depression of the 1930s, farm prices fell much further than other prices in the economy.
Federal government established the Commodity Credit Corporation (CCC) to help farmers.
Section 3

43. Agricultural Price Supports (cont.)
Under the CCC support programs
A target price was established to help stabilize farm prices.
Loan supports like the nonrecourse loan were available.
Farmers received a deficiency payment.
Deficiency Payments
Section 3

44. Agricultural Price Supports (cont.)
Agricultural output increased greatly over time, as did the number of farmers.
Government wanted farmers to stop farming—the Conservation Reserve Program of 1985 pays farmers not to farm.
Section 3

45. Agricultural Price Supports (cont.)
Efforts to make farming responsive to the market forces of supply and demand continue today with the Farm Security and Rural Investment Act of 2002.
Section 3

46. When Markets Talk
Markets send signals when prices change in response to events.
Section 3

47. When Markets Talk (cont.)
Markets bring buyers and sellers together.
Markets are said to “talk” when prices in them move up or down significantly in reaction to events that take place elsewhere in the economy.
Stock markets, for example, react quickly to interest rate changes made by the Federal Reserve. They also react to events that take place in other parts of the world. All types of crisis's have an impact on the world’s market and people.
Section 3

48. Section Objectives Students will be able to:
Identify, describe and give examples price ceilings and floors and how they distort the market.
Identify, describe and give examples of price supports.
Describe and give examples of how markets talk in response to world events.
Section 3-Preview

49. Section 3-End

50. Allocation of Resources Prices are signals that help buyers and sellers make economic decisions. Without prices, societies must find other ways to allocate resources.
VS 1

51. Market Equilibrium When buyers and sellers can freely make production and purchase decisions, the price of a product will move toward market equilibrium. At this point, the quantity supplied is exactly equal to the quantity demanded.
VS 2

52. Social Goals and Prices The social goals of equity and security sometimes can be achieved only by giving up parts of other goals. Price ceilings or price floors can help achieve these goals, but they may result in fewer goods and services offered overall.
VS 3

53. VS-End

54. Figure 1

55. Figure 2

56. Figure 3

57. Figure 4

58. Figure 5

59. Figure 6

60. Figure 7

61. Margaret (Meg) Whitman (1956– )
ranked by Fortune magazine as the “Most Powerful Woman in Business” in 2005
turned eBay into one of the fastest-growing companies in U.S. history
Profile

62. Select a transparency to view.
Economic Concepts Transparencies
Transparency 7 Markets and Prices
Transparency 8 Supply and Demand
Select a transparency to view.
Concept Trans Menu

63. Concepts Trans 1

64. Concepts Trans 2

65. DFS Trans 1

66. DFS Trans 2

67. DFS Trans 3

68. price monetary value of a product as established by supply and demand
Vocab1

69. rationing system of allocating goods and services without prices
Vocab2

70. ration coupon
permit allowing holder to receive a given amount of a rationed product
Vocab3

71. rebate
partial refund of a product’s original price
Vocab4

72. neutral 
favoring neither side in a dispute
Vocab5

73. criteria
a standard or rule on which judgment can be based
Vocab6

74. economic model
a simplified version of a complex behavior expressed in the form of an equation, graph, or illustration
Vocab7

75. equilibrium price
price where quantity supplied equals quantity demanded
Vocab8

76. surplus
situation where quantity supplied is greater than quantity demanded at a given price
Vocab9

77. shortage
situation where quantity supplied is less than quantity demanded at a given price
Vocab10

78. voluntary
done or brought about by free choice
Vocab11

79. fluctuates
changes continually and irregularly
Vocab12

80. price ceiling highest legal price that can be charged for a product
Vocab13

81. minimum wage
lowest wage that can be paid to most workers
Vocab14

82. price floor
lowest legal price that can be paid for a product
Vocab15

83. target price
price floor for agricultural products set by the government to stabilize farm income
Vocab16

84. nonrecourse loan
agricultural loan that carries no penalty or further obligation if it is not paid
Vocab17

85. deficiency payment
cash payment making up the difference between the market price and the target price
Vocab18

86. arbitrarily
randomly or by chance
Vocab19

87. stabilize
to make steady or unwavering
Vocab20

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