1. What Role Do Prices Play?

2. Prices Convey Information to Consumers and Producers
“Prices are like messengers conveying news” ~Thomas Sowell

3. Prices Convey Information to Consumers and Producers
Consumers- price signals the opportunity cost of a purchase
The next best use for the money you spend
When the opportunity cost of buying is high people tend to think carefully before spending
Most consumers narrow searches by price range
Reflects consumer’s expectation of what will be available at that price

4. Prices Convey Information to Consumers and Producers
Producers- price tells them what consumers want
A way to gauge consumer preferences
Appeal to consumers they hope will buy their products
Use price to send a message about products and their intended markets

5. Prices Create Incentives to Work and Produce
Incentives-matter principle
Price as incentive because of potential for profit
Rising prices motivate production increase
Falling prices motivate decrease of production
Prices in the form of wages motivate workers
High wages inspire job-seeking
Low wages act as disincentive for people to seek work

6. Think/Pair/Share
Think: When home prices increase or decrease, what industries/people are affected or inspired to action?
Pair: With a partner compare and combine your lists of industries/people; then discuss how might they react to a home price increase and a decrease?
Share: Be prepared to share at least one example with the class

7. Prices Allow Markets to Respond to Changing Conditions
Prices give markets the flexibility the need to reach equilibrium even under changing conditions
Hurricanes Katrina/Rita 2005
By throwing gasoline market into disequilibrium, illustrated the key role that prices play in correcting both shortages and surpluses

8. Prices Allocate Scarce Resources Efficiently
Guide resources to their most efficient uses.
Ex. Dairy products
Yogurt, ice cream, cheese
Greatest demand will buy the most milk in order to make products to meet that demand
Producers automatically allocate milk (scarce resource used to make many different products) to its most valued use

9. Prices in General
When prices are allowed to freely rise and fall to their equilibrium levels, they do an effective job of allocating scarce resources to their best uses.

10. How Government Intervention Affect Markets

11. How Government Intervention Affect Markets
The record of price controls goes as far back as human history. They were imposed by the Pharaohs of ancient Egypt. They were decreed by Hammurabi, king of Babylon, in the eighteenth century B.C. They were tried in ancient Athens.
—Henry Hazlitt, 1993

12. Why Governments Intervene in Markets
Occasionally governments intervene in the market in an attempt to influence prices
They do this by placing limits on how high or low certain prices may be. (price controls)

13. Why Governments Intervene in Markets
When persuaded that supply and demand will result in prices that are unfairly high for consumers or unfairly low for producers.
1970s price controls on gas in response to reduced shipments of foreign oil b/c of crises in Middle East
Set price floors or price ceilings, both affect supply & demand

14. Price Floors Lead to Excess Supply
Price Floor: Minimum price consumers are required to pay for a good or service
Meant to push prices up, ensures benefit for producers
Minimum wage: Government-imposed legal floor on the hourly wage rate
Rationale: in low-skill job markets, supply and demand would drive the equilibrium wage so low that many workers would earn to little to live decently
Result: Excess supply

15. Price Ceilings Lead to Excess Demand
Price Ceiling: maximum price consumers may be required to pay for a good or service.
Meant to enable consumers to buy essential goods or services they wouldn’t be able to afford at the equilibrium price
Often established in response to crises
Rent Control: make it illegal to charge more than a specified monthly amount for rental housing. Introduced in WWII to protect poor families

16. Dealing with Excess Supply and Demand
Price controls prevent market clearing price resulting in excess supply or demand
Shortages  rationing: controlled distribution of a limited supply or a good or service
License plate number gas purchases
WWII tires, gas, sugar and other goods
Shortages black market: an illegal market in which goods are traded at prices or in quantities higher than those set by law.

17. Think/Pair/Share
Think: What are some examples of a price ceiling leading to excess demand, or a price floor leading to excess supply?
Pair: With your partner develop one example into a brief story.
Share: Be prepared to share your example or story with the class.