Transcript Slide 1 - Ms. Kane`s Class

Chapter 6
Prices and Decision Making
Section 1 – Prices as Signals
The Price System…
Where Supply and Demand
Collide!
What are prices?
•The monetary value of a product as
established by supply and demand
–a signal that helps us make economic
decisions
Advantages of Prices
1. Prices are neutral – they favor neither buyer
nor seller
•
The more competitive the market, the more
accurate the price
2. Prices are flexible – they allow for market
changes
3. Prices require no cost of
administration – they gradually
set themselves
4. Pricing is familiar – we’ve seen
them all our lives
Allocations Without Prices
• Without prices, another system
must be used to decide who gets
what
1. Saved for the government (communism)
2. Rationing (“fair” share)
Problems with Fairness
•No one is happy with their share
•Cost – someone has to pay for printing and
the work used to make the coupon
•No incentive for hard work
Prices as a System
• Helps individuals with choices
• Signals that help distribute resources between
markets
• An informational network
• Rebate – a partial refund of a product used to
promote a product
Your Own Thoughts:
How do you feel about the current energy situation
facing Americans? Using what you have learned so far
in economics, do you think we should take advantage of
the oil located in Canada? Be sure to discuss the
following topics:
• Supply
• Demand
• Opportunity Costs
• Trade-Offs (Alternative Choices)
Section 2
The Price System at
Work
Price Adjustment Process
• Transactions in a market economy are voluntary because
they are a compromise between the buyer and seller
Think of a bargain between
buyers and sellers at a store
Price Adjustment Process (cont.)
• Economic Model – a
set of information
listed as a table or
graph to predict
outcomes
Market Equilibrium
• The perfect price – when the demand and supply
curves meet (prices are stable)
A Surplus
• When the quantity supplied is greater than
the quantity demanded
Equilibrium Price
A Shortage
• When the quantity demanded is greater than
the quantity supplied
Equilibrium Price
Explaining and Predicting Prices
Changes In Supply
Competitive Price Theory
• Markets only have to be reasonably
competitive rather than perfect to
be useful
• Sellers compete to meet consumer
demands - forced to lower prices
(encourages keeping costs down
too).
• Competition among buyers helps
prevent prices from falling too far.
• What is a competitive market?
• How are prices determined in a competitive
market?
• What do merchants usually do to sell items that are
overstocked? What does this tell you about the
equilibrium price for the product?
Section 3
Social Goals vs.
Market Efficiency
Distorting Market
Incomes
• Price
Ceiling– a
maximum
legal price
that can be
charged for a
product
Distorting Market Incomes
Price Floors – the lowest
legal price that can be
paid for a good or
service
*Minimum Wage – the
lowest legal wage that
can be paid to most
workers
• May cause unemployment
• Raises poor people’s
incomes
Price Ceilings and Floors
Agricultural Loan
Supports
• U.S. government tried to stabilize
agriculture
• Target Price – a price floor for farm
products
• The Government also gave out loans
to farmers that did not have a
penalty or further obligation if not
paid back
Price Controls:
• Our society
has price
controls to
manage some
equity even if
it means
losing some
efficiency