1. Prices & Decision Making

2. Advantages of Prices Prices link producers and consumers
prices in a competitive market economy favor neither the producer or consumer
Prices are a result of competition between producers
Prices in a market economy are flexible
Major events can change prices
New technology can change prices

3. Prices have no cost of administration
Prices happen without outside help or interference
Even when prices change, most people don’t notice because it is gradual.

4. Prices as a System
As long as we have a pricing system we have a way to allocate resources
We don’t have to ration or barter
In a competitive market, we have a market equilibrium = situations where prices are relatively stable, and supply of goods and services is equal to the demand

5. Surplus = situation where the quantity supplied is greater than the quantity demanded
Surplus turns up as unsold products on shelves and takes up space in suppliers warehouses
Sellers then figure out their prices are too high and have to lower the price to get rid of the surplus

6. Shortage = a situation in which the quantity demanded is greater than the quantity supplied at a given price
Producers have no more to sell and wish they had charged more for their product
As a result, both price and quantity supplied will go up next time

7. Equilibrium price = the price that “clears the market” by leaving neither a surplus or shortage at the end of the trading period
When price is too high, the surplus will tend to force it down
When price is too low, the shortage tends to force it up
As a result, the market tends to seek its own equilibrium.

8. Explaining and Predicting Prices
Change in price is normally a result of a change in supply, a change in demand, or changes in both
Changes in Supply:
Example: agriculture experiences big swings in prices
Weather can change the supply, and therefore the price

9. Changes in Demand:
Changes in income, tastes, prices of related products, expectations, and number of consumers all affect demand for goods and services
Example: gold prices have changed dramatically over the last 20 years
1980, rising prices, uncertain economic conditions, etc. created high demand for gold
So gold producers opened closed mines and resumed production
This increased the supply and drove the price of gold down