1. Bellringer
Many companies sell different types of cell phones. Some consumers prefer to use a specific brand because of its different kind of features. This is an example of
A) monopoly.
B) oligopoly.
C) pure competition.
D) monopolistic competition.

2. Prices

3. The Language of Prices
Prices are the main form of communication b/n producers and consumers in a market
Model of Pricing—its not just what it’s worth
“What is it worth? To whom? At what time? In what context? In relation to what other goods?—Ludwig von Mises

4. Benefits of the Price System
Information
prices give producers an idea of demand and what they should produce
consumers use prices to gauge the relative worth of a good
Incentives
profit motive
producers and consumers have incentives at the varying prices (law of supply and demand)

5. Benefits of the Price System
Choice
the higher the incentive to supply, the greater the choice of product supplied
the more demand, the more choices as suppliers look to generate more sales from more people
Efficiency
prices cause a wise use of resources as businesses look to make higher profits
quickly conveys the value of a good, thus saving the consumer time
Flexibility
one of the price system’s greatest strengths is ability to deal with change

6. Limitations of the Price System
Market Failures
limitations are often referred to as market failures b/c the market fails to account for some costs and therefore cannot distribute them appropriately

7. Limitations of the Price System
Externalities
side effects that result from the production of a good on people not directly connected with its production or consumption
considered costs of production as well, but are paid by other people and not included in the price of goods
negative externality
E.g., air pollution=GA Power
they don’t have to pay, we dodoctor bills, etc.
positive externality
Examples=immunizations, historical preservation

8. Limitations of the Price System
Public goods
cost is not assigned to all customers unless required by gov’t
if the gov’t didn’t require all to pay through taxes, some would be unwilling to do so, even though everyone benefits
costs of public goods often more than benefits, but usually go unnoticed b/c it is spread over so many people
Instability
although flexibility is good, it can create havoc when prices increase or decrease in short amounts of time

9. Determining Prices Market Equilibrium Graph:
when quantity supplied equals quantity demanded for a product equal at the same timea.k.a. “market clearing price”
Graph:

10. Determining Prices Surplus Graph:
quantity supplied exceeds quantity demanded
producers lower prices to try to gain equilibrium
Graph:

11. Determining Prices Shortage Graph:
quantity demanded exceeds quantity supplied
producers raise prices
Graph:

12. Shifts in both
Supply and Demand
What happens to Price
and what happens to
Quantity?

13. P S S P1
Quantity
will definitely
increase. P1 P D1
Price is
Indeterminate D
It will either
go up. Q Q1 Q1 Q
Increase in demand
Increase in supply

14. P S S P1
Quantity
will definitely
increase. P1 P D1
Price is
Indeterminate D
It stayed the
same. Q Q1 Q1
Increase in demand
Increase in supply

15. P S P1
Quantity
will definitely
increase. S P P1 D1
Price is
Indeterminate D
It went down. Q Q1 Q1
Increase in demand
Increase in supply

16. What happens to the price and quantity if there
is an increase in demand and a decrease in supply?
Price definitely goes up; Quantity is indeterminate

17. What happens to the price and quantity if there
is a decrease in demand and an increase in supply?
Price definitely goes down; Quantity is indeterminate

18. What happens to the price and quantity if there
is a decrease in demand and an decrease in supply?
Price is indeterminate; Quantity will definitely decrease

19. Managing Prices
The gov’t will sometimes choose to set prices and ration goods to try to keep the market functioning smoothly and avoid instability caused by dramatic price swings

20. Setting Prices Price Ceiling (binding and non-binding)
Price Floor (binding and non-binding)

21. Consequences of Setting Prices
Most economist advise against gov’t interferences in the market that cause imbalances, etc.
price ceilings=shortages
price floors=surpluses
E.g., look at rent controls and crop prices in Sowell book

22. Consequences of Setting Prices
Rationing
gov’t decides the distribution of a product instead of price
E.g., UGA football tickets

23. Consequences of Rationing
Unfairness
rationing favors certain groups of people, while the price system is neutral

25. Consequences of Rationing
Cost
gov’t must determine what and how much is rationed, and then enforce it

27. Consequences of Rationing
Black Markets
goods exchanged illegally
defeats the purpose of rationing

28. Taxes Who bears the burden when taxes are passed? Tax incidence
the manner in which the burden of a tax is shared among market participants
We will look at this in-depth in the next two chapters, as well as how elasticity effects tax incidence

29. Price Gouging
Stossel Video