P RICES ?? BW: Get sheets from back and 3-hole punch Complete Unit Warm-up (48-50)

C HAPTER 6.1 “What factors affect price?” Objectives How do supply/demand create equilibrium in marketplace What happens to prices when equilibrium is disturbed 2 ways the govt. intervenes in markets to control prices Impact of price ceilings and floors on free-market Key Terms /Flash/Ch06/Econ_OnlineLectureNotes_ch6_s1.swf /Flash/Ch06/Econ_OnlineLectureNotes_ch6_s1.swf

I NTRODUCTION What factors affect price? Prices affected by laws of supply and demand Also affected by actions of the govt. Govt. may intervene to set min/max prices

W HAT IS EQUILIBRIUM ? Point of balance at which qty. demanded equals qty. supplied At equilibrium price of a good is STABLE

E QUILIBRIUM In order to find the equilibrium price/qty. you use supply/demand schedules When market is at equilibrium, both buyers/sellers benefit How many slices are sold at equilibrium?

D ISEQUILIBRIUM : M ARKET PRICE ANYWHERE BUT EQUILIBRIUM ( PRODUCES 2 OUTCOMES ) Shortage Causes prices to rise as the demand for good is greater than the supply of the good. Surplus Causes a drop in prices as the supply for a good is greater than the demand for good. o Which would be an true of when our concession stand starts selling slices of pizza and popcorn for 1/3 the price towards ends of games? o Surplus o Answer 2 ?s on 136

G OVERNMENT I NTERVENTION Price Ceilings (maximum price charged for good) Rent control Price ceiling on apt. rents Prevents inflation during housing crises Helps poor cut housing costs Can lead to poorly managed buildings bc of upkeep Price Floors (minimum price set) Minimum wage is best example Affects demand/supply of workers Price Supports in Agriculture Govt. buys excess crops when prices fall below certain level Attempting to create demand

L ESSON C LOSING HW for tomorrow Critical Thinking Answer 8-10 Workbook; 48,49, and 91

C HAPTER 6.2 Finish up 8-10 Critical Thinking from Sect. 1

S ECT. 1 C RITICAL T HINKING What impact does shortages have on consumers? May have to wait to buy or not find the goods How does effect differ for producers Producers can raise prices or increase production to earn profits What action will a producer usually take when price is higher than equilibrium price? Lower prices to increase demand Why might producer choose to keep price same? If product can be stored easily till demand rises Argument for/against rent control Affords housing to poor; causes housing shortages

C HAPTER 6 S ECTION 2 “How do changes in supply and demand affect equilibrium?” Objectives Why free market naturally tends to equilibrium How a market reacts to increase/decrease in supply How a market reacts to increase/decrease in demand Key Terms ucts/ /Flash/Ch06/Econ_OnlineLectureNotes_ch6_s2.swf ucts/ /Flash/Ch06/Econ_OnlineLectureNotes_ch6_s2.swf

I NTRODUCTION How do changes in supply and demand affect equilibrium? Changes in supply/demand cause prices to go up and down, which disrupts the equilibrium for a good. In a free market, price and quantity tend to move toward equilibrium whenever they find themselves in disequilibrium

E QUILIBRIUM When a market is in disequilibrium it either has shortage or surplus. Both will eventually lead toward equilibrium Shortages Causes a firm to raise its prices. Higher prices cause the qty. supplied to rise and demand to fall until they are equal again. Surpluses (opposite) Cause a firm to drop its prices. Prices cause qty supplied to fall and demand to rise until equilibrium is restored

M ARKET R EACTIONS Increase in Supply Shift in supply curve will change the equilibrium price and qty. Causes the market to move toward new equilibrium price Example is Digital Camera (6.5 pg. 142) Causes shift in curve to right “Moving Target” Equilibrium is in constant motion as market conditions change As supply/demand increases/decreases a new equilibrium is created.

M ARKET R EACTIONS Decrease in Supply Shifts curve to left, results in higher market price and decrease in qty. sold Factors that lead to decrease Increase in costs of resources to produce good Increase in labor costs Increase in govt. regulations

M ARKET R EACTIONS Increase in Demand Fads often lead to increases in demand Causes curve to shift to right Fads cause shortages to appear in various forms Empty selves Long lines to buy small supply of product Search costs (driving multiple places searching) Restoring Equilibrium A fad will reach a peak, prices will drop Shortage becomes a surplus, curve shifts back left and restores original price/qty. New technology can also decrease consumer demand by creating better substitute.

L ESSON C LOSING HW: Critical Thinking 6-9 Workbook pgs. 50, 99 I’ll be gone tomorrow All wasted time will be written down by sub and you will make it up Monday 2 Tasks for tomorrow Cornell Notes Section 3 Personal Finance Work on Netbooks!

C HAPTER 6.3

S ECTION 3 Objectives Roles that prices play in free market Advantages of price-based system How price-based system leads to a wider choice of goods and efficient allocation of resources Relationship b.t. prices and profit incentive Key terms ucts/ /Flash/Ch06/Econ_OnlineLectureNotes_ch6_s3.swf ucts/ /Flash/Ch06/Econ_OnlineLectureNotes_ch6_s3.swf

I NTRODUCTION What roles do prices play in a free market economy? Prices are used to distribute goods/resources throughout the economy Prices play other roles: Serving as a language for buyers/sellers Serving as incentive for producers Serving as a signal of economic conditions

P RICE AS AN I NCENTIVE Prices provide a standard of measure of value throughout the world Prices act as a signal that tells producers/consumers how to adjust Prices tell buyers/sellers whether goods are in short supply or available Price system is flexible and free, and it allows for a wide diversity of goods/services

P RICE AS A S IGNAL Prices can act as a signal to producers/consumers High price tells producers that a product is in demand and they should make more Low price tells producers that a good is being overproduced High price tells consumers to think about their purchases Low price tells consumers to buy more of a product

F LEXIBILITY OF P RICES Prices are flexible, meaning they can be increased to solve problems of shortage and decreased to solve problems of surplus Raising prices is one of the quickest ways to solve a shortage. It reduces quantity demanded and only people w/enough money will be able to pay higher prices.

F REE M ARKET V. C OMMAND Free market systems based on prices cost nothing to administer Central planning, on the other hand, requires a number of people to decide how resources are distributed Unlike central, free market pricing is based on decisions made by consumers and suppliers

C ONSUMER C HOICES In a free market Prices help consumers choose among similar products Allow producers to target consumers with products most desired In a command economy Production is restricted to a variety of each product Results in fewer consumer choices

R ATIONING AND B LACK M ARKET In command economy, or in a Free Market during war, shortages are common. One response is rationing Often business can then be conducted on black market to bypass rationing Ex: WWII US govt. used rationing to control shortages Family given tickets to buy the shortage items, couldn’t legally buy them again until new tickets issued

E FFICIENT R ESOURCE A LLOCATION Free market system Allows for efficient resource allocation Factors of production used for most valuable purposes Works with the Profit Incentive Producers (firms) will use resources available to ensure greatest amount of profit Profit Incentive Wealth of Nations Adam Smith wrote that businesses do best when they provide what people need Financial rewards (profits/deals) motivate people

F REE M ARKET P ROBLEMS What circumstances can system fail to allocate resources efficiently? Imperfect competition Can affect prices, then affecting consumer decisions Negative Externalities Side effects of production; unintended costs Imperfect Information Prevents market from operating smoothly