Price and Decision Making
Do Now!!!
• Think about a time when you bought a
product that you really wanted. Was the
product worth the price? Did you ...
Prices as Signals
• Price is the monetary value of a product that
is established by supply and demand.
• They communicate ...
The Advantages
• Serve as link between producers and
consumers.
• They perform an allocation function for
four reasons
Reasons
• They favor neither the producer nor the
consumer.
• They are flexible.
• They have no cost of administration.
• ...
Allocations w/out prices
• Rationing is used to
allocate goods and
services without the
use of price. Has pros
and cons.
•...
Price as System
• They are favored because they do more for
the consumer because the provide signals
that help utilize res...
Market Event Supply or
Demand
Right or
Left
redwood lumber Environmentalists urge
consumers to boycott
redwood products.
H...
1. What is the problem with health insurance today?
2. Why are people skeptical about using insurance?
3. How do you think...
Price Adjustment
• Because of the movement in the market
(transactions), a compromise must take
place to benefit all parti...
Market Equilibrium
• A situation that is
reached when prices
are relatively stable.
Qty. of goods supplied
equals the qty....
Surpluses and Shortages
• Surplus occurs when
the qty. supplied is
more than qty.
demanded.
Figure 6.2aFigure 6.2a
Surpluses and Shortages
• Shortages are where
qty. demanded is more
than the qty. supplied.
Figure 6.2bFigure 6.2b
Elasticity and Price
• Prices can change dramatically based on the
elasticity of the curve.
• If the price changes and peo...
Changes in supply and demand
• Changes in supply and demand affect price
changes as well. The shifts of both curves
will f...
Competitive Price Theory
• Represents a set of ideal conditions &
outcomes; it serves as a model to measure
market perform...
• To be competitive, sellers are forced to
lower prices, which makes them find ways
to keep their costs down.
• Competitio...
Social Goals and Market Efficiency
• Freedom, Efficiency, full employment,
price stability and Growth.
• These goals are p...
Distorting Market Outcomes
• Setting prices at a desirable level can
achieve some social goals.
• Prices are not allowed t...
Price Ceilings
• Price ceilings are the
max. legal price that
can be set for a
product.
• They are well below
the equilibr...
Price Floors
• Price Floors are the
lowest legal price that
can be paid for a g/s.
• Minimum wage is an
example of a price...
Agricultural Price Supports
• The govt. has stepped in as a regulator to
help stabilize the prices of agricultural
product...
Loan Supports
• Farmers borrow
money from
Commodity Credit
Corp. (CCC) at a
target price.
• Most are nonrecourse
loans.
Fi...
Deficiency Payment
• Surpluses were created
because of the CCC
loan program.
• Farmers sell their
crops for highest price
...
When the Market Talks
• The market talks when changes in prices
occur. This usually happens when prices
move up or down in...
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Chapter 6 Price

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Chapter 6 Price

  1. 1. Price and Decision Making
  2. 2. Do Now!!! • Think about a time when you bought a product that you really wanted. Was the product worth the price? Did you see the same product at a lower price? How did that make you feel?
  3. 3. Prices as Signals • Price is the monetary value of a product that is established by supply and demand. • They communicate information and provide incentives to consumers and producers.
  4. 4. The Advantages • Serve as link between producers and consumers. • They perform an allocation function for four reasons
  5. 5. Reasons • They favor neither the producer nor the consumer. • They are flexible. • They have no cost of administration. • They are common knowledge to consumers and producers.
  6. 6. Allocations w/out prices • Rationing is used to allocate goods and services without the use of price. Has pros and cons. • Pros – Does not need price. • Cons – Highly unfair – There is a high admin. Cost. – Negative impact on motivation to work.
  7. 7. Price as System • They are favored because they do more for the consumer because the provide signals that help utilize resources. • They link all markets within the economy.
  8. 8. Market Event Supply or Demand Right or Left redwood lumber Environmentalists urge consumers to boycott redwood products. Hula hoops Brad Pitt confides to People magazine that "he gets a big kick out of his hula hoop." gasoline Two oil supertankers collide. U.S. cars The U.S. imposes a tariff on Japanese car imports. Taxi service Local subway workers go on strike cement A 7.9 earthquake hits San Francisco.
  9. 9. 1. What is the problem with health insurance today? 2. Why are people skeptical about using insurance? 3. How do you think we need to fix this problem?
  10. 10. Price Adjustment • Because of the movement in the market (transactions), a compromise must take place to benefit all parties. • Economic models are used to explain the changes in price.
  11. 11. Market Equilibrium • A situation that is reached when prices are relatively stable. Qty. of goods supplied equals the qty. of goods demanded. Figure 6.2dFigure 6.2d
  12. 12. Surpluses and Shortages • Surplus occurs when the qty. supplied is more than qty. demanded. Figure 6.2aFigure 6.2a
  13. 13. Surpluses and Shortages • Shortages are where qty. demanded is more than the qty. supplied. Figure 6.2bFigure 6.2b
  14. 14. Elasticity and Price • Prices can change dramatically based on the elasticity of the curve. • If the price changes and people don’t buy it, then it is time to change the price again.
  15. 15. Changes in supply and demand • Changes in supply and demand affect price changes as well. The shifts of both curves will force the price to be adjusted to find equilibrium.
  16. 16. Competitive Price Theory • Represents a set of ideal conditions & outcomes; it serves as a model to measure market performance. • Competitive market allocates resources efficiently.
  17. 17. • To be competitive, sellers are forced to lower prices, which makes them find ways to keep their costs down. • Competition among buyers keeps prices from falling too far.
  18. 18. Social Goals and Market Efficiency • Freedom, Efficiency, full employment, price stability and Growth. • These goals are partially responsible for increased role of govt. in our economy. • It is important to evaluate each goal and scenario for you to form an opinion on it. • Achieving equity and security calls for policies that distort the market.
  19. 19. Distorting Market Outcomes • Setting prices at a desirable level can achieve some social goals. • Prices are not allowed to adjust to equilibrium and the price system can’t transmit accurate information to consumers and producers.
  20. 20. Price Ceilings • Price ceilings are the max. legal price that can be set for a product. • They are well below the equilibrium price. • Affects allocation of resources. Figure 6.5aFigure 6.5a
  21. 21. Price Floors • Price Floors are the lowest legal price that can be paid for a g/s. • Minimum wage is an example of a price floor. • The floor is implemented to keep the price of a product higher. Figure 6.5bFigure 6.5b
  22. 22. Agricultural Price Supports • The govt. has stepped in as a regulator to help stabilize the prices of agricultural products. • Two types – Loan support – Deficiency payment • Both make use of a target price to help maintain stability.
  23. 23. Loan Supports • Farmers borrow money from Commodity Credit Corp. (CCC) at a target price. • Most are nonrecourse loans. Figure 6.6aFigure 6.6a
  24. 24. Deficiency Payment • Surpluses were created because of the CCC loan program. • Farmers sell their crops for highest price and CCC would pay deficiency payment to make up the difference. Figure 6.6bFigure 6.6b
  25. 25. When the Market Talks • The market talks when changes in prices occur. This usually happens when prices move up or down in a significant amount. • Consumers and Producers use this information and make decisions to respond to the changes.
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