1. Price

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

3. Advantages of Prices

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

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

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

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

8. 5. Efficient  people naturally understand prices

9. Allocations without Prices

10. 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.

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

12. 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)

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

14. –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 ?

15. 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...)

16. Market Price System How Prices are Determined in a Market

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

18. 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.

19. Market Equilibrium Price stability - Where demand equals supply. The quantities are in equilibrium. P 20 15 10 5 0 0 1 3 5 7 9 11 13 15 17 19 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.

20. Day One- Surplus (Review) Surplus — quantity supplied is greater than quantity demanded at a given price. P 20 15 10 5 0 0 1 3 5 7 9 11 13 15 17 19 Q D S Surplus Price Difference Between Surplus Price and Equilibrium Price is 10

21. Day Two- Shortage (Review) Shortage — quantity supplied is less than quantity demanded - at a given price P 20 15 10 5 0 0 1 3 5 7 9 11 13 15 17 19 Q D S Shortage Price Difference Between Shortage Price and Equilibrium Price is 5

22. Day Three- Lower Surplus P 20 15 10 5 0 0 1 3 5 7 9 11 13 15 17 19 Q D S Surplus Price Difference Between Surplus Price and Equilibrium Price is 5

23. Day 4- Equilibrium Reached  Quantity supplied equals quantity demanded; price that clears the market. P 20 15 10 5 0 0 1 3 5 7 9 11 13 15 17 19 Q D S

24. Loss Leader-item sold below cost to attract customers. P 20 15 10 5 0 0 1 3 5 7 9 11 13 15 17 19 Q D S Equilibrium Price Sellers Cost Loss Leader Price

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

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

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

28. Social Goals

29. Price Ceilings  Price Ceiling- A maximum price that can be charged for a product. P 20 15 10 5 0 0 1 3 5 7 9 11 13 15 17 19 Q D S Price Ceiling A way to remember- you look up at a Ceiling, Prices want to go up with a Ceiling

30. 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

31. 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. 

32. Price Floors  Price Floor- A minimum price that can be charged for a product. P 20 15 10 5 0 0 1 3 5 7 9 11 13 15 17 19 Q D S Price Floor A way to remember- you look down at a Floor, Prices want to go down with a Floor

33. Practical Example of Price Floors  Minimum Wage 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Equilibrium Price Price Floor

34. With the current minimum wage, is there a surplus or shortage of workers ? 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Equilibrium Price Price Floor

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

36. How do businesses compensate for minimum wage laws ?

37. 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