chapter 6 price
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Price and Decision Making
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Do Now!!!
• Think about a time when you bought a product that you really wanted. Was the product worth the price? Did you see the same product at a lower price? How did that make you feel?
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Prices as Signals
• Price is the monetary value of a product that is established by supply and demand.
• They communicate information and provide incentives to consumers and producers.
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The Advantages
• Serve as link between producers and consumers.
• They perform an allocation function for four reasons
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Reasons
• They favor neither the producer nor the consumer.
• They are flexible.
• They have no cost of administration.
• They are common knowledge to consumers and producers.
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Allocations w/out prices
• Rationing is used to allocate goods and services without the use of price. Has pros and cons.
• Pros– Does not need price.
• Cons– Highly unfair
– There is a high admin. Cost.
– Negative impact on motivation to work.
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Price as System
• They are favored because they do more for the consumer because the provide signals that help utilize resources.
• They link all markets within the economy.
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Market Event Supply or Demand
Right or Left
redwood lumber Environmentalists urge consumers to boycott redwood products.
Hula hoops Brad Pitt confides to People magazine that "he gets a big kick out of his hula hoop."
gasoline Two oil supertankers collide.
U.S. cars The U.S. imposes a tariff on Japanese car imports.
Taxi service Local subway workers go on strike
cement A 7.9 earthquake hits San Francisco.
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1. What is the problem with health insurance today?
2. Why are people skeptical about using insurance?
3. How do you think we need to fix this problem?
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Price Adjustment
• Because of the movement in the market (transactions), a compromise must take place to benefit all parties.
• Economic models are used to explain the changes in price.
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Market Equilibrium• A situation that is
reached when prices are relatively stable. Qty. of goods supplied equals the qty. of goods demanded.
Figure 6.2dFigure 6.2d
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Surpluses and Shortages
• Surplus occurs when the qty. supplied is more than qty. demanded.
Figure 6.2aFigure 6.2a
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Surpluses and Shortages
• Shortages are where qty. demanded is more than the qty. supplied.
Figure 6.2bFigure 6.2b
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Elasticity and Price
• Prices can change dramatically based on the elasticity of the curve.
• If the price changes and people don’t buy it, then it is time to change the price again.
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Changes in supply and demand
• Changes in supply and demand affect price changes as well. The shifts of both curves will force the price to be adjusted to find equilibrium.
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Competitive Price Theory
• Represents a set of ideal conditions & outcomes; it serves as a model to measure market performance.
• Competitive market allocates resources efficiently.
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• To be competitive, sellers are forced to lower prices, which makes them find ways to keep their costs down.
• Competition among buyers keeps prices from falling too far.
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Social Goals and Market Efficiency
• Freedom, Efficiency, full employment, price stability and Growth.
• These goals are partially responsible for increased role of govt. in our economy.
• It is important to evaluate each goal and scenario for you to form an opinion on it.
• Achieving equity and security calls for policies that distort the market.
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Distorting Market Outcomes
• Setting prices at a desirable level can achieve some social goals.
• Prices are not allowed to adjust to equilibrium and the price system can’t transmit accurate information to consumers and producers.
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Price Ceilings• Price ceilings are the
max. legal price that can be set for a product.
• They are well below the equilibrium price.
• Affects allocation of resources.
Figure 6.5aFigure 6.5a
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Price Floors• Price Floors are the
lowest legal price that can be paid for a g/s.
• Minimum wage is an example of a price floor.
• The floor is implemented to keep the price of a product higher.
Figure 6.5bFigure 6.5b
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Agricultural Price Supports
• The govt. has stepped in as a regulator to help stabilize the prices of agricultural products.
• Two types– Loan support– Deficiency payment
• Both make use of a target price to help maintain stability.
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Loan Supports• Farmers borrow
money from Commodity Credit Corp. (CCC) at a target price.
• Most are nonrecourse loans.
Figure 6.6aFigure 6.6a
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Deficiency Payment• Surpluses were created
because of the CCC loan program.
• Farmers sell their crops for highest price and CCC would pay deficiency payment to make up the difference.
Figure 6.6bFigure 6.6b
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When the Market Talks
• The market talks when changes in prices occur. This usually happens when prices move up or down in a significant amount.
• Consumers and Producers use this information and make decisions to respond to the changes.