1. When More Is Less
Functions of Prices
Economics LAP 12

2. Objectives A B Explain the importance of price.
Explain how prices are determined. B

3. Explain the importance of price.

4. You are planning a surprise birthday party with limited cash.
You want to buy food and decorations.
There are no prices on anything in the grocery store.

5. What Is Price?
The amount of money that is paid for a good, service, or resource
The value placed on a good, service, or resource

6. How Much Will Consumers Pay?
Three factors influence the price a consumer is willing to pay:
Buying power
Value
Relative price

7. What Is Relative Price? One price compared to another
The ratio between two prices

8. An Example of Relative Prices
You have $20

9. How Consumers Use Relative Prices
Whether prices go up or down, relative prices do not change if the ratio remains the same.
By comparing relative prices, consumers choose the combinations that bring them the most satisfaction.

10. How Others Use Relative Prices
Businesses compare the relative prices of different resources to determine which combination to use in production.
Resource owners compare relative prices in different markets to determine where to sell their resources.

11. Using Relative Prices to Answer the 3 Economic Questions
What will be produced?
Products that are most profitable, sold at the highest prices the market will bear
How will products be produced?
At the lowest cost possible
How will products be allocated?
To whoever is willing and able to pay the price

12. Functions of Relative Prices
Information
Incentives
Rationing
Higher price = Lower quantity purchased
Lower price = Higher quantity purchased

13. Explain how prices are determined.B

14. Impact of Supply and Demand
As price increases, supply goes up.
As price decreases, supply goes down.
Demand:
As price decreases, demand goes up.
As price increases, demand goes down.

15. Supply and Demand Schedule for Gaming Consoles

16. The Equilibrium Price Also known as the market- clearing price
The price at which the quantity that buyers want to buy is equal to the quantity that sellers are willing to sell
Very rarely the price that exists in the marketplace

17. Excess Supply The quantities supplied are more than demanded.
The price is set higher than the equilibrium price.
A buyer’s market develops.

18. Excess Demand The quantities supplied are less than demanded.
The price is set lower than the equilibrium price.
A seller’s market develops.

19. The Substitution Effect
Changes in relative prices cause buyers to substitute the purchase of one product for another.
Whenever the demand price of a product changes, the relative prices of other products change.
When the relative prices of other products change, consumers change the combination of products that they buy.

20. Market Price What is the market price?
The actual price in a market at any particular time
Excess supply or demand cause market price to fluctuate.

21. Think of five products or services you have recently purchased.
If the prices went down, would you buy more?
What is the maximum price you would pay for each?
If the prices went above your maximum price, what would you buy instead?

22. A new drink is initially priced at $1.00 to gain market share.
No indication that the price will rise in the future.
Is it ethical to hook new customers?
Should the company have to make it clear that the price is a promotion and/or that the price will rise?
Would you continue to buy the product if the price increased?

23. Acknowledgments Original Developers:
Christopher C. Burke, Aaron McMahon, MBA Research
Version 2.0
Copyright © 2017
MBA Research and Curriculum Center

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