• 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?
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.
• Serve as link between producers and
• They perform an allocation function for
• They favor neither the producer nor the
• They are flexible.
• They have no cost of administration.
• They are common knowledge to consumers
Allocations w/out prices
• Rationing is used to
allocate goods and
services without the
use of price. Has pros
– Does not need price.
– Highly unfair
– There is a high admin.
– Negative impact on
motivation to work.
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.
Market Event Supply or
redwood lumber Environmentalists urge
consumers to boycott
Hula hoops Brad Pitt confides to
People magazine that
"he gets a big kick out
of his hula hoop."
gasoline Two oil supertankers
U.S. cars The U.S. imposes a
tariff on Japanese car
Taxi service Local subway workers
go on strike
cement A 7.9 earthquake hits
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?
• 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.
• A situation that is
reached when prices
are relatively stable.
Qty. of goods supplied
equals the qty. of
Figure 6.2dFigure 6.2d
Surpluses and Shortages
• Surplus occurs when
the qty. supplied is
more than qty.
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 people don’t buy it,
then it is time to change the price again.
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
Competitive Price Theory
• Represents a set of ideal conditions &
outcomes; it serves as a model to measure
• Competitive market allocates resources
• 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.
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.
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
• Price ceilings are the
max. legal price that
can be set for a
• They are well below
the equilibrium price.
• Affects allocation of
Figure 6.5aFigure 6.5a
• Price Floors are the
lowest legal price that
can be paid for a g/s.
• Minimum wage is an
example of a price
• The floor is
implemented to keep
the price of a product
Figure 6.5bFigure 6.5b
Agricultural Price Supports
• The govt. has stepped in as a regulator to
help stabilize the prices of agricultural
• Two types
– Loan support
– Deficiency payment
• Both make use of a target price to help
• Farmers borrow
Corp. (CCC) at a
• Most are nonrecourse
Figure 6.6aFigure 6.6a
• Surpluses were created
because of the CCC
• Farmers sell their
crops for highest price
and CCC would pay
deficiency payment to
make up the
Figure 6.6bFigure 6.6b
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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