1. Prices and Decision Making Chapter 6

2. Sec. 1 Prices as Signals  Price- monetary value established by supply and demand.  Prices serve as a link between producers and consumers

3. Advantage of Price: 1. Prices in competitive market economy are neutral b/c they favor neither the producer or consumer. - they are the result of competition b/w buyers and sellers 2. Prices in a market economy are flexible. - unforeseen events such as natural disasters and war affect prices. - development of new technology helps produce more items for less 3. Prices have no cost of administration. - competitive markets find their own way of adjusting prices w/o outside help or interference. 4. Familiarity

4. Allocations Without Prices  Rationing- a system under which an agency such as government decides everyone’s equal.  Ration Coupon- a ticket or a receipt that entitles the holder to obtain a certain amount of a product. …Why could this be a problem in the U.S.???

5. Problems of Allocations 1. Everyone feels like his or her share is too small 2. Cost. Someone has to pay for printing, salaries of distribution …. They could get stolen, sold, or counterfeited. 3. Negative impact on people’s incentive to work and produce.

6. Prices as a System  Why do we get rebates??

7. Sec. 2 The Price System at Work  Economic Model- a set of assumptions that can be listed in a table, illustrated w/ a graph, or even stated algebraically.  Market Equilibrium- a situation in which prices are relatively stable, and the quantity demanded.  Surplus- quantity supplied is greater than quantity demanded.  Shortage- quantity demanded is greater than quantity supplied.  Equilibrium Price- is the price that “clears the market” by leaving neither a surplus nor a shortage at the end of the trading period.

8. Section 3 Social Goals vs. Market Efficiency  Price Ceilings- maximum legal price that can be charged for a product  Price Floors-the lowest price that can be paid for a good or service.  Market Talk- market speak collectively for all buyers and sellers who trade in the markets.