1. PRICES AND DECISION MAKING 6.2 “The Price System at Work”
Thailand TWO-price system
CHAPTER 6
PRICES AND DECISION MAKING
6.2 “The Price System at Work”

2. Quick recap: In a market economy, prices adjust
Moving on…

3. Market Equilibrium
A situation when prices are relatively stable, and the quantity of goods or services supplied is equal to the quantity demanded.

4. True or False?
Companies are closer to selling their products at the equilibrium price when their product first goes on the market vs. after the product has been on the market for awhile.
Why is it false?
When an equilibrium price is found, it tends to stay there.

5. Surplus v. Shortage Quantity demanded is greater than supplied
Quantity supplied is less than the quantity demanded
BOTH ARE SHORTAGES!
Which one causes the price to increase? Decrease?

6. Chart: Factors Affecting Price Changes in Agriculture
Which one shows mostly inelastic supply AND demand?
The other chart shows an ELASTIC __________ curve. (supply or demand)

7. The importance of elasticity
True or False: Price changes in any given market are likely to be wider if both supply and demand are ELASTIC.
FALSE!!!
Let’s go back to the chart…

8. Price question Why is the price of gas more expensive near a freeway?
Portland returning car story

9. PRICES AND DECISION MAKING 6.3 “Social Goals vs. Market Efficiency”
CHAPTER 6
PRICES AND DECISION MAKING
6.3 “Social Goals vs. Market Efficiency”

10. 7 Economic & Social Goals Most People Seem to Share:
Which TWO are the LEAST compatible with a market economy?
Efficiency
Economic Growth
Equity
Full Employment
Freedom
Price Stability
Security

11. DISTORTING market outcomes
Price ceilings: Max. legal price that can be charged
Price floors: Lowest legal price that can be paid

12. PRICE CEILINGS When could it be used?
NYC – Rent controls to make housing more affordable for long-term residents
Hypothetical situation
Rent – Gov’t dictates that apartments could rent for only $1,000/mo
Who would this help? Who would this hurt?
What would you do if you were the owner/landlord?
Change function of building? Incentive for adding more units?
Costa Rica – Rent can’t go up for 3 years
Good idea? Bad idea?

13. PRICE FLOORS MINIMUM WAGE!
What is the most common example of a price floor?
MINIMUM WAGE!
Who does this help? Who does this hurt?
Lowest wages in this area—Would employer pay less if he/she could?
Does this create more unemployment?
What do you think?
Let’s take a look
Equity v. efficiency
Minimum Wage in the U.S.

16. REAL v. NOMINAL?

17. Minimum Wage & Unemployment

18. On a supply & demand curve, which will be the price ceiling
On a supply & demand curve, which will be the price ceiling? Which will be the price floor?