Price

Prices as Signals  Signals- a sign to help in making a decision

Advantages of Prices

1. Neutral  Does not favor consumer or producer.  The more competition the more efficient

2. Flexible  Can absorb shock. War, disasters, weather. People adapt and adjust consumption & production.

3. Freedom of Choice  There are Substitutions.  Freedom to decide to buy.

4. No Administrative Cost — No government cost, No bureaucrats. Competitive markets find their own prices. Price adjusts peoples buying habits.

5. Efficient  people naturally understand prices

Allocations without Prices

1. Rationing  A system where the government decides everyone’s fair share. Each person receives a ration coupon.  Rationing was used during WWII to allocate needed supplies to the war effort. It was also used in the 1970s when Oil supplies were severely restricted.

Problems with Rationing  1. Problem of Fairness- What is “fair”? 2. High Administrative Cost. 3. Diminished Incentives. Everyone shares equally so why work?

How do individual businesses determine their prices ?  1. Their fixed, variable and start up costs  2. The quantity demanded price schedule –(What would consumers demand at each and every price)

For your Business Projects  1. You need to know your costs in order to figure out your prices.

–For Example –Suppose you purchase 200 Harleys at 10,000 dollars each. (The purchase of Harleys is a variable cost) –Your fixed costs, and other variable costs for a month of your business total 30,000 dollars –What would be the selling price of an individual Harley in order for you to meet your break even point ?

For your business projects 1. A working list of startup costs (One time purchases) 2. A working list of fixed costs (Rent, phone, etc.. ) 3. A working list of variable costs (Labor, electricity etc...)

Market Price System How Prices are Determined in a Market

 How are prices determined in a competitive market.  The Adjustment Process - Price determination.

Economic Model  Description of how the economy behaves and is expected to perform in the future.  A set of assumptions (Table, Graphs, formulas) that analyze behavior and predict outcomes.  Economists use it to make predictions. Business use it to set and initial price on products.  Used to estimate the future of markets, products, etc.

Market Equilibrium Price stability - Where demand equals supply. The quantities are in equilibrium. P Q D S Seller wants a higher price than the buyer wants to pay. They negotiate a price in the middle. Market equilibrium has been set.

Day One- Surplus (Review) Surplus — quantity supplied is greater than quantity demanded at a given price. P Q D S Surplus Price Difference Between Surplus Price and Equilibrium Price is 10

Day Two- Shortage (Review) Shortage — quantity supplied is less than quantity demanded - at a given price P Q D S Shortage Price Difference Between Shortage Price and Equilibrium Price is 5

Day Three- Lower Surplus P Q D S Surplus Price Difference Between Surplus Price and Equilibrium Price is 5

Day 4- Equilibrium Reached  Quantity supplied equals quantity demanded; price that clears the market. P Q D S

Loss Leader-item sold below cost to attract customers. P Q D S Equilibrium Price Sellers Cost Loss Leader Price

 How do surpluses and shortages help the market find the equilibrium price? Answer the following questions in complete sentences.

 How do retail merchants move product that is overstocked?  What has this got to do with Equilibrium Price?

 Why do American farmers consistently produce surplus crops?  Government policy.  Who pays? Is this Good?

Social Goals

Price Ceilings  Price Ceiling- A maximum price that can be charged for a product. P Q D S Price Ceiling A way to remember- you look up at a Ceiling, Prices want to go up with a Ceiling

Practical Examples of Price Ceilings  Apartment Rents in large Cities  San Francisco- North Beach 1 BR 1 BA, $900  Chicago, IL 1 BR 1BA $1200  Sacramento 1bd,1ba $925

Disadvantage of Price Ceilings on Apartments  1. Landlords will turn apartments into offices or condominiums  2. Permanent shortage created for consumers  3. Landlords will reduce costs by reducing upkeep expenses. 

Price Floors  Price Floor- A minimum price that can be charged for a product. P Q D S Price Floor A way to remember- you look down at a Floor, Prices want to go down with a Floor

Practical Example of Price Floors  Minimum Wage Equilibrium Price Price Floor

With the current minimum wage, is there a surplus or shortage of workers ? Equilibrium Price Price Floor

If there was no minimum wage, what would happen to unemployment numbers?

How do businesses compensate for minimum wage laws ?

Government Price Supports  Agricultural supports  The CCC- Commodity Credit Corporation: creates a target price for farmers.  Loan Supports- Nonrecourse loans- a loan that does not carry a penalty or an obligation to repay the loan