1. Prices
Chapter 6

2. Lesson 1: How Prices Work
Essential Question:
How do prices help determine What, How, and For Whom to produce?

3. Price
The monetary value of a product as established by supply and demand
Signals:
High prices: producers to produce more and for buyers to buy less
Low prices: producers to produce less and for buyers to buy more

4. Advantages of Prices Prices help decide: WHAT, HOW, AND FOR WHOM
Prices are neutral in a competitive market economy
Result of competition b/w buyers and sellers:
More competitive = more efficient price adjustment process

5. Advantages of Prices (cont)
Prices are flexible in a market economy
Think about computers THEN and NOW
Allows for the “SHOCK” of unforeseen events and changes in the market
Prices have no administration cost
Competitive markets find their own prices w/out interference
Prices change from one level to another gradually

6. Advantages of Prices (cont)
Prices are familiar and easily understood
Mommy “I want a candy bar!”
You “Can I purchase that TV?”
No ambiguity: if it is $1 then you know you will pay $1 (plus tax in some states)
Make quick decisions
Minimum effort

7. Allocations Without Prices
Help us make economic decisions that “allocate” scarce resources and the product made from them
What if the PRICE SYSTEM did not exist?
Like command economies
Use another system right?

8. Allocations Without Prices (cont)
Rationing:
System where the government decides everyone’s “FAIR” share
RATION COUPON:
Obtain a certain allotted amount
Widely used during wartime
Questions of Fairness?
High Administrative cost
Diminishes incentives

9. Price as a System Economists favor the price system
Serve as signals that help allocate resources between markets
Oil ($5 to $40 a barrel in 1970’s)
Oil is inelastic
Higher energy cost = less money to spend elsewhere
1ST affected full size automobiles
Gave rebates: a partial refund of the original price of the product
Closed plants, laid off workers, started to change to small production

10. Price as a System Higher prices on oil = shift in productive resources
Prices help buyers and sellers allocate resources b/w markets
Economist think of the price as a system
Part of an informational network
Links all markets in the economy

11. Copy and answer the following questions for lesson 1
What are the four advantages of prices?
What is rationing?
What are the four problems with rationing?
How do prices help us make decisions?
How do prices connect markets in an economy?

12. Lesson 2: The Effects of Prices?
Essential Question:
What factors affect prices?

13. The Price Adjustment Process
Appealing feature of a Competitive Market Economy
EVERYONE who participates has a hand determining PRICES
Makes prices neutral and impartial

14. Cont. Buyers and sellers have exactly the OPPOSITE hopes and desire
Buyers = find good buys at low price
Sellers = high prices and large profits
Neither can get what they WANT so adjustments must be made

15. The Price Adjustment Process
Compromise needs to benefit BOTH parties
DEMAND and SUPPLY make a complete picture of the market
Price adjustments help a competitive market reach market equilibrium, with fairly equal supply and demand

16. Surplus Shows up as UNSOLD products on suppliers shelves
Takes up space
Know that the price is TOO high
NEED to LOWER the price to attract buyers
PRICES tend to go DOWN when there is a surplus

17. Shortage Suppliers have no more product to SELL
Wished they would have charged a higher price
Result = BOTH price and quantity supplied will go UP
We do not know how much PRICE will go up

19. EQUILIBRUIM PRICE = occurs when supply MEETS demand

20. Equilibrium Price
“Clears the market” neither a surplus nor a shortage at the end of the trading period
Economic Model of the market
CANNOT know how long it will take to reach
Price is set TOO HIGH the surplus will tend to force price down
Price is set TOO LOW the shortage will ten to force price up

21. Explaining and Predicting Prices
A change in price is the result of a
Change in Supply
Change in Demand
Or BOTH
Elasticity of Demand is also important when predicting prices

22. Explaining and Predicting Prices: Importance of Elasticity
Demand curve is MORE elastic
When a given change in supply occurs with an INELASTIC demand curve
PRICES change dramatically

23. Continued When a change in supply occurs with an ELASTIC demand curve
Price change is smaller
BOTH supply and demand are INELASTIC = wider change in price
BOTH supply and demand are ELASTIC = less change in price

24. Explaining and Predicting Prices: Change in Demand
Changes in income, taxes, prices of related goods, expectations, and number of consumers
Example: GOLD

25. The Competitive Price Theory
The theory of competitive pricing represents a set of ideal conditions and outcomes; it serves as a model to measure market performance
Competitive market allocates resources efficiently

26. The Competitive Price Theory
To be competitive:
Sellers are forced to lower prices
Find ways to keep cost down
Competition among buyers keeps prices from falling TOO far

27. Complete Lesson 2 questions on handout

28. Lesson 3: Social Goals. Prices, and Market Efficiency
Essential Question: What factors affect prices?

29. Controlling Prices
Government may set prices at socially desirable levels to achieve social goals
Prices not allowed to adjust to their equilibrium levels

30. Controlling Prices
Prices not allowed to adjust to their equilibrium levels
Price ceiling: a maximum legal price that can be charged for a product (Ex. rent controls in NYC)
Price floor: lowest legal price that can be paid for a good or service (Ex. minimum wage)

31. When Markets Talk
Markets send signals when prices change in response to events..
Markets bring buyers and sellers together
Markets are said to “talk” when prices in them move up or down significantly in reaction to events that take place elsewhere in the economy.
Stock markets, for example, react quickly to interest rate changes made by the Federal Reserve.

32. Complete Supply and Demand curve activity and complete questions – turn in for a grade.