1. The Price System

2. Unit 2, Opener # ___
Wheat game?

3. I) The Price System Review: What is equilibrium price?
Situation that exists when consumer demand and producer supply are equal
In a market system, an increase in the amount of producers leads to an increase in supply
Recall: What happens to equilibrium price when there is an increase in supply? What about a decrease?

4. II) Incentives for Producers
Defined: Something that encourages producers and consumers to act in certain ways consistent with their best interests.
Incentives for Producers
What is the primary incentive for producers?
Prices of goods that producers would be willing to sell signal whether it is good time to enter into a market or to leave a market
Increasing prices mean a higher likelihood of profit, which will lead to more producers entering into the marketplace
Falling prices and possibility of losses lead producers to leave

5. II) Incentives for Producers
Competitive Pricing
The selling of products at lower prices than others
Helps lure customers away from rival producers
Maintains overall profits by selling more of a good or service
Example: Competitive Pricing
Egg Roll King prices their Chinese lunch meals at $5
Panda Express opens, and sells their lunch meals at $4
Lower profit margin
Hopes to sell more units, earning back what was lost with setting lower prices
Egg Roll King must choose to lower price or risk losing customers

6. III) Incentives for Consumers
What is the primary incentive of a consumer?
Impact of High Prices
What do high prices cause you, as a consumer, to think about a good or service?
Discourage people from buying a good
Often causes consumers to buy something else
Impact of Discount Prices
A surplus of a good causes prices to drop
Producers signal to consumers that it is a great time to buy when prices are low

7. Brainstorm
Do you think demand for gas is going up or down during the weeks of unrest in the Middle East?
Let’s say that economists said there is an increase in demand for gas in the last few months. Can this increase in demand be explained by looking at the factors that cause a change in demand?

8. IV) Interventions in The Price System
Price Ceiling
The maximum price that a seller may charge for a good or a service
Usually implemented by the government
Example: Rent-controlled apartments

9. Price Ceiling: Rent Control
What happened to the rent of one bedroom apartments when rent became decontrolled?
Who would be in favor of the changes in the rent market in this city, the owners of the apartments or those living there? Why?

10. Price Ceiling Example UC Davis Football Team
Team wins a national championship, and support for the team grows
The school prints 30,000 tickets and sells these tickets at $15 each
Demand is for 60,000 tickets
Shortage of 30,000
University could raise price to find equilibrium price.
President of University & director of athletics would rather keep tickets affordable
Creates a black market
A market where goods or services exchanged are outside of the normal producer/consumer interaction

11. IV) Interventions in The Price System
Price Ceiling
The maximum price that a seller may charge for a good or a service
Usually implemented by the government
Example: Rent-controlled apartments
Price Floor
The minimum price that buyers must pay for a good or service
Example: Minimum wage

12. Price Floor: Minimum Wage
What happens if the minimum wage is set at the black line?
What happens if the minimum wage is set at the blue line?
Which is an example of a price floor?

13. IV) Interventions in the Price System
Rationing
Defined:
A system in which the government allocates goods and services using factors other than price
If a good is being rationed, it is being provided to the public by the government regardless of the market price
The citizens do not pay for the good, but instead it is provided to them
The government usually rations goods in times of emergency

14. Rationing: WWII
Goods became scarce for consumers on the homefront during WWII because so much was dedicated to the war
Goods were scarce, therefore price went sky high, and only the wealthy could afford the goods
To help, certain goods were provided to consumers by the government