Transcript High prices
Prices Chapter 6 Price • The monetary value of a product as established by supply and demand • Signals: • High prices: producers to produce more and for buyers to buy less • Low prices: producers to produce less and for buyers to buy more Advantages of Prices • Prices • help decide: WHAT, HOW, AND FOR WHOM • Prices are neutral in a competitive market economy • Result of competition b/w buyers and sellers: • More competitive = more efficient price adjustment process Advantages of Prices • Prices are flexible in a market economy • Think about computers THEN and NOW • Allows for the “SHOCK” of unforeseen events and changes in the market • Prices have no administration cost • Competitive markets find their own prices w/out interference • Prices change from one level to another gradually Advantages of Prices • Prices are familiar and easily understood • Mommy “I want a candy bar!” • You “Can I purchase that TV?” • No ambiguity: if it is $1 then you know you will pay $1 (plus tax in some states) • Make quick decisions • Minimum effort Allocations Without Prices • Help us make economic decisions that “allocate” scarce resources and the product made from them • What if the PRICE SYSTEM did not exist? • Like command economies • Use another system right? Allocations Without Prices (cont) • Rationing: • System where the government decides everyone’s • • • • “FAIR” share RATION COUPON: • Obtain a certain allotted amount • Widely used during wartime Questions of Fairness? High Administrative cost Diminishes incentives Price as a System • Economists favor the price system • Serve as signals that help allocate resources between markets • Oil ($5 to $40 a barrel in 1970’s) • Oil is inelastic • Higher energy cost = less money to spend elsewhere • 1ST affected full size automobiles • Gave rebates: a partial refund of the original price of the product • Closed plants, laid off workers, started to change to small production Price as a System • Higher prices on oil = shift in productive resources • Prices help buyers and sellers allocate resources b/w markets • Economist think of the price as a system • Part of an informational network • Links all markets in the economy The Price Adjustment Process • Appealing feature of a Competitive Market Economy • EVERYONE who participates has a hand determining PRICES • Makes prices neutral and impartial • Buyers and sellers have exactly the OPPOSITE hopes and desire • Buyers = find good buys at low price • Sellers = high prices and large profits • Neither can get what they WANT so adjustments must be made The Price Adjustment Process • Compromise needs to benefit BOTH parties • DEMAND and SUPPLY make a complete picture of the market • Price adjustments help a competitive market reach market equilibrium, with fairly equal supply and demand Surplus • Shows up as UNSOLD products on suppliers shelves • • • • Takes up space Know that the price is TOO high NEED to LOWER the price to attract buyers PRICES tend to go DOWN when there is a surplus Shortage • Suppliers have no more product to SELL • Wished they would have charged a higher price • Result = BOTH price and quantity supplied will go UP • We do not know how much PRICE will go up Figure 6.2c Figure 6.1a EQUILIBRUIM PRICE = occurs when supply MEETS demand Figure 6.2d Equilibrium Price • “Clears the market” neither a surplus nor a shortage at the end of the trading period • Economic Model of the market • CANNOT know how long it will take to reach • Price is set TOO HIGH the surplus will tend to force price down • Price is set TOO LOW the shortage will ten to force price up Explaining and Predicting Prices • A change in price is the result of a • Change in Supply • Change in Demand • Or BOTH • Elasticity of Demand is also important when predicting prices Explaining and Predicting Prices: Importance of Elasticity • Demand curve is MORE elastic • When a given change in supply occurs with an INELASTIC demand curve • PRICES change dramatically • When a change in supply occurs with an ELASTIC demand curve • Price change is smaller • BOTH supply and demand are INELASTIC = wider change in price • BOTH supply and demand are ELASTIC = less change in price Explaining and Predicting Prices: Change in Demand • Changes in income, taxes, prices of related goods, expectations, and number of consumers • Example: GOLD The Competitive Price Theory • The theory of competitive pricing represents a set of ideal conditions and outcomes; it serves as a model to measure market performance • Competitive market allocates resources efficiently • To be competitive: • Sellers are forced to lower prices • Find ways to keep cost down • Competition among buyers keeps prices from falling TOO far Controlling Prices • Govt may set prices at socially desirable levels to achieve social goals • Prices not allowed to adjust to their equilibrium levels • Price ceiling: a maximum legal price that can be charged for a product (Ex. rent controls in NYC) • Price floor: lowest legal price that can be paid for a good or service (Ex. minimum wage) When Markets Talk • Markets send signals when prices change in response to events.. • Markets bring buyers and sellers together • Markets are said to “talk” when prices in them move up or down significantly in reaction to events that take place elsewhere in the economy. • Stock markets, for example, react quickly to interest rate changes made by the Federal Reserve.