Transcript Ch._5

Ch. 5 - Prices
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Prices The “language” spoken between consumers and
producers
For producers, price says this is how much it costs
us to produce and distribute this good/service
Consumers respond by either buying it or not –
saying they want/need the product or not
Prices (cont)
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Benefits of the Price System:
1) Information – for both producers and consumers.
Relative worth
2) Incentives – provides producers and consumers
with incentives to participate in the market
3) Choice – the price system increases the choices
available in the market
4) Efficiency – producers are forced to use resources
wisely, consumers can quickly compare the prices of
different goods
5) Flexibility – Can deal with change quickly
Prices (cont)
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Limitations of the Price System -
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1) Externalities -
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Negative or positive side effects for people not
directly involved in the production or consumption
of a good/service.
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Negative – pollution created by production
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Positive – restaurant near a factory
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2) Public Goods -
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Goods consumed by all members of a group
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National defense, court system, police, fire, etc
Prices (cont)
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3) Instability Although flexibility is a benefit, price swings caused
by severe weather, natural disasters, strikes, etc.
This can cause producers to go out of business or
consumer hardships.
Ch. 5, Sec. 2 – Determining Prices
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Market Equilibrium Quantity supplied and quantity demanded for a
product are equal at the same price
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This price “clears the market”
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Surplus -
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QS > QD
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Shortage -
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QD > QS
Equilibrium (cont)
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Shifting Supply or Demand
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Market: iPods
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1) Gov't raises corporate tax rate by 10%
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2) Gov't announces that consumer incomes have
increased by 6%
3) MP3 players are reduced in price for holidays
4) Consumers anticipate prices of iPods to go up
next year
5) The price of plastic used in iPods rises
iPod Examples (cont)
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6) Apple forecasts demand for iPods to increase next
year
7) Surveys indicate consumers like the iPod's size
and performance better than competition
8) Gov't announces subsidies for US-based computer
companies (including Apple)
9) Unemployment reaches an all-time high in US for
18-30 year olds
10) Music downloads triple in price due to a new tax
Ch. 5, Sec. 3 – Managing Prices
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Other functions of government in our economy:
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1) Assigns the costs of public goods (tax types/rates)
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2) Assigns the costs of externalities (pollution
controls, fines for damage)
3) Reduces instability by setting prices/rationing
Managing Prices (cont)
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Gov't can set prices as follows:
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1) Price Ceilings -
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A gov't regulation that establishes a maximum price
for a particular good
Example?
Rent control – High demand for apartments in cities
results in a limited supply
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RESULT:
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Shortage
Managing Prices (cont)
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2) Price Floors A gov't regulation that establishes a minimum level
for prices
Examples?
Agricultural goods – good weather, large supply of
crop, prices drop – enable farmer to recover costs
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Minimum wage
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RESULT:
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Surplus
Managing Prices (cont)
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Rationing -
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Gov't decides how to distribute a product
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Has the US used rationing?
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WW II – the US rationed goods (tires, gasoline,
meat, butter, silk and coffee) to consumers at home
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Sports tickets – set aside for home fans
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Gasoline 1973 – after OPEC price rise
Managing Prices (cont)
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Issues with rationing:
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1) Unfair -
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Does not treat all consumers equally
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2) Cost -
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High administrative costs (who?, how much?,
enforcement)
3) Black Markets -
Goods exchanged illegally at higher than market
prices