Chapter 6 Price!

Objectives: Students will learn… How the market establishes an equilibrium price How the equilibrium price balances supply & demand How supply & demand models can be used to determine the equilibrium price of a good or service. Common ways in which governments may change free market pricing and some of the policy reasons for intervention.

Price is probably one of the factors you think about. What factors do you consider when deciding whether to purchase an item? Price is probably one of the factors you think about. Low prices may attract buyers, but they also impact sellers. In a market economy, prices are determined by supply and demand. PRICE

Prices as Signals Prices are 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. Prices are signals!

The Advantages Serve as link between producers and consumers. They perform an allocation function for four 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.

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.

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.

Using the information from the chart, write a demand schedule Using the information from the chart, write a supply schedule

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.

Market Forces Shortage—quantity demanded is greater than quantity supplied Rationing—limiting demand Surplus—quantity supplied is greater than quantity demanded. Equilibrium price—equal supply and demand (the price that clears the market)

Market Equilibrium A situation that is reached when prices are relatively stable. Qty. of goods supplied equals the qty. of goods demanded.

Surpluses and Shortages Surplus occurs when the qty. supplied is more than qty. demanded.

Surpluses and Shortages Shortages are where qty. demanded is more than the qty. supplied.

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.

Competitive Price Theory Represents a set of ideal conditions & outcomes; it serves as a model to measure market performance. Competitive market allocates resources efficiently.

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.

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.

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.

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.

Price Floors Price Floors are the lowest legal price that can be paid Minimum wage is an example of a price floor. The floor is implemented to keep the price of a product higher.

Loan Supports Farmers borrow money from Commodity Credit Corp. (CCC) at a target price. Most are nonrecourse loans.

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.

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.