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 purchaseThe next best use for the money you spendWhen the opportunity cost of buying is high people tend to think carefully before spendingMost consumers narrow searches by price rangeReflects 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 wantA way to gauge consumer preferencesAppeal to consumers they hope will buy their productsUse price to send a message about products and their intended markets
5 Prices Create Incentives to Work and Produce Incentives-matter principlePrice as incentive because of potential for profitRising prices motivate production increaseFalling prices motivate decrease of productionPrices in the form of wages motivate workersHigh wages inspire job-seekingLow wages act as disincentive for people to seek work
6 Think/Pair/ShareThink: 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 conditionsHurricanes Katrina/Rita 2005By 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 productsYogurt, ice cream, cheeseGreatest demand will buy the most milk in order to make products to meet that demandProducers automatically allocate milk (scarce resource used to make many different products) to its most valued use
9 Prices in GeneralWhen 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.
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 pricesThey 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 EastSet 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 serviceMeant to push prices up, ensures benefit for producersMinimum wage: Government-imposed legal floor on the hourly wage rateRationale: in low-skill job markets, supply and demand would drive the equilibrium wage so low that many workers would earn to little to live decentlyResult: 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 priceOften established in response to crisesRent 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 demandShortages rationing: controlled distribution of a limited supply or a good or serviceLicense plate number gas purchasesWWII tires, gas, sugar and other goodsShortages black market: an illegal market in which goods are traded at prices or in quantities higher than those set by law.
17 Think/Pair/ShareThink: 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.