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.

Prices

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

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)

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

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

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

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

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:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Price Gouging Stossel Video