1. Chapter 6:
Prices & Decision Making

3. Signals to Decision Making
Price
Monetary ($$$) value of a product as established by supply / demand
High prices are signals for producers to produce more and for buyers to buy less.
Low prices are signals for producers to produce less and for buyers to buy more
help decide the three basic WHAT, HOW, and FOR WHOM questions all societies face

4. Advantages of Prices
Neutral (favor neither the producer nor the consumer)
Flexible (Unforeseen events such as natural disasters and war affect the prices of many items)
Zero cost to administer (Competitive markets tend to find their own prices without outside help or interference)
Well known (we’ve known of prices since we were little)

5. Allocating without prices
Rationing
system under which an agency such as government decides everyone’s “fair” share (people receive ration coupon)
widely
used
during
wartime

6. Problems with rationing
Everyone feels that their share is too small
High administrative costs to manage
Diminishing incentive to work

7. Prices as a system
The market for full-size automobiles was one of the first to feel the effects
To move their inventories, some manufacturers began to offer a rebate: a partial refund of the original price of the product
As time went on, however, the surplus of unsold cars remained. Automakers began reducing their production of large cars
The result of higher prices in the international oil market, then, was a shift of productive resources out of the large car market into other markets

8. market equilibrium
situation in which prices are relatively stable, and the quantity of goods or services supplied is equal to the quantity demanded

9. How do we find the Equilibrium?
we have to examine the reactions of buyers and sellers to market prices

10. surplus quantity supplied is greater than the quantity demanded
Surplus shows up as unsold products on suppliers’ shelves, and it begins to take up space in the suppliers’ warehouses

11. Surplus

12. shortage the quantity demanded is greater than the quantity supplied
When a shortage happens, producers have no more products to sell, and they end the day wishing that they had charged higher prices for their products

13. Shortage…continued

14. equilibrium price
price that “clears the market” by leaving neither a surplus nor a shortage
Figure 6.2c

15. price ceiling
maximum legal price that can be charged for a product

16. minimum wage
lowest legal wage that can be paid to most workers

17. price floor
lowest legal price that can be paid for a good or service

18. Ch. 7: Market Structures
the nature and degree of competition among firms operating in the same industry.

19. Laissez-faire
Gov’t should not interfere with commerce or trade

20. monopoly -is a market structure with only one seller of a particular product
trusts – legally formed combinations of corporations or companies

21. price discrimination - the practice of charging customers different prices for the same product
cease and desist order is an FTC ruling requiring a company to stop an unfair business practice
public disclosure, requirement that businesses reveal information to the public