Transcript Prices & Decision Making

Prices & Decision
Making
Overview & Objectives
(Do Not Write)
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In chapter 4 we learned demand from the point
of view of the consumer. In chapter 5 we
learned about supply form the point of the view
of the producer. Finally, we learn about price
and how it serves as a communicator between
the two in their fight to find equilibrium in the
market. Remember, equilibrium is always the
goal.
Objectives for Chapter 6
Section 1
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Explain how prices act as signals
Describe the advantages of using price as a way
to allocate resources
Understand the difficulty of allocation when we
don’t use the price system.
Prices as Signals
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Price – Monetary value of a product as
established by supply and demand
Price is neutral (Doesn’t favor either side)
Price is flexible. (When unforeseen events occur,
price adjusts)
Price requires very little help. The authorities
need not it adjust generally speaking.
Price is firm and speaks every language.
Everyone understands it and respects.
Prices As Signals
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Think or Price as an
Umpire in the never
ending game between
Supply and Demand.
The Price System
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The pricing system allows us to allocate our
resources most efficiently. Remember, the
problem of scarcity is fundamental. Resource
allocation is crucial to a strong economy.
Alternatives to the Pricing System
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Often in Command
economies, goods and
services are reserved for
those with the right
connections.
Alternatives to the Pricing System
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Rationing in times of
sever shortages my be
necessary but comes
with a number of
problems.
1. Corruption
2. High Administrative
Cost to keep “Fair”
Diminishing Incentive
for all
Terminology
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Rationing Functioning of Prices– system in
which the government or authoritative agency
decides each person’s “fair” share
Ration coupon – allows for holder to redeem
for certain amounts of a particular product
Rebate – partial refund of the price
Price System at Work
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Economic Model – set of assumptions listed in
a table to help track economic data, combining
the supply and demand curves to display the
entire market
Economic equilibrium – Supply = Demand
MARKET DEMAND &
SUPPLY
BUSHELS
OF CORN
P
$5
4
3
2
1
QD
10
20
35
55
80
MARKET
x
200 DEMAND
B 2,000
U
Y
E
R
S
4,000
7,000
11,000
16,000
BUSHELS
OF CORN
P QS
$5
4
3
2
1
60
50
35
20
5
MARKET
200 SUPPLY
S 12,000
x
E
L
L
E
R
S
EQUILIBRIUM
10,000
7,000
4,000
1,000
MARKET DEMAND &
SUPPLY
Price of Corn
CORN
MARKET
P QD
$5 2,000
4 4,000
3 7,000
2 11,000
1 16,000
P
S
$5
CORN
MARKET
P Q
4
Market
S
$5 12,000
Clearing
Equilibrium 4 10,000
3
3 7,000
2 4,000
1 1,000
2
1
o
D
2
4
6
78
10 12 14 16
Quantity of Corn
Q
MARKET DEMAND &
SUPPLY
Price of Corn
CORN
MARKET
P QD
$5 2,000
4 4,000
3 7,000
2 11,000
1 16,000
P
$5
Surplus
CORN
MARKET
S
P Q
At a $4 price
4
$5
supplied than 4
demanded 3
2
1
more is being
3
2
1
o
D
2
4
6
78
10 12 14 16
Quantity of Corn
Q
S
12,000
10,000
7,000
4,000
1,000
MARKET DEMAND &
SUPPLY
Price of Corn
CORN
MARKET
P QD
$5 2,000
4 4,000
3 7,000
2 11,000
1 16,000
P
S
$5
CORN
MARKET
P Q
At a $2 price
4
$5
demanded than 4
3
supplied
2
1
Shortage
more is being
3
2
1
o
D
2
4
6
78
101112 14 16
Quantity of Corn
Q
S
12,000
10,000
7,000
4,000
1,000
Prices System Continued
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Surplus – Excess amount of a particular good
and/or service
Shortage – Limited amount of a particular
good and/ or service
Equilibrium Price or Market Equilibrium–
“Clears the Market” – Will leave neither a
surplus or shortage
Changes in Supply
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Price changes are heavily affected by real world
circumstances. Surpluses or shortages severely
effect market equilibrium.
For example, instability in the Middle East is
sending oil prices surging due to supply
concerns
REVIEW YOUR SUPPLY DETERMINANTS
Changes in Demand
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Consumer changes are no different either. Price
will either decrease or increase based on the
determinants given in chapter 4. (Income,
Substitutes, Tastes, # of consumers,
expectations)
Social Goals vs Market Efficiency
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Price Ceiling – Maximum amount that can be
charged for a product
Minimum Wage – the lowest legal wage that can
be paid to workers
Price Floor – Minimum price that can be
charged for a good or service
Competitive Theory of Pricing
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Based on ideal or “classroom” conditions stating
that prices for similar goods will stay
competitive from store to store
Certain conditions may alter price somewhat
such as how informed a buyer is or where a
store is located.
Social Goals vs. Market Efficiency
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If price controls are set, markets are disrupted
and equilibrium cannot be achieved.
It is more important however at to achieve
certain social goals as opposed to efficient
markets.
For example, minimum wage promotes
economic equality.
Terminology
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Price Ceiling – Maximum legal price that can
be charged for a product.
Price Floor – Lowest legal price that can be
paid for a product.
Target Price - Agricultural price floor set by
the Government to stabilize farm incomes
Deficiency Payment – Sent to producers to
make up for the difference in the market price
and the target price.
When Markets Talk
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The information that is exchanged between
consumer and producer and vice versa can be
described as “conversation within the market.”
Price as well as the other determinants serve as
they language they use in achieving stability
within the market