6-1: Prices as Signals<br />Prices help the economy run smoothly by providing a good way to allocate resources.<br />Prices are neutral, because they favor neither the producer or the consumer.<br />Prices are flexible, absorbing unexpected shocks from unforeseen events.<br />Prices are familiar and easy to understand.<br />Prices have no costs of administration.<br />
<ul><li>How would allocations be made without a price system?
Has a negative impact on the incentive to work.
Prices do more than convey information to buyers and sellers in a market. They also allocate resources between markets. This is why economists think of prices as a “system” that links all markets in the economy.</li></li></ul><li>6-2: The Price System at Work<br />Buyers and sellers have exactly opposite goals.<br /> Buyers want to find good buys at low prices.<br /> Sellers hope for high prices and large profits.<br />Because transactions are voluntary in a market economy, the compromise that settles the differences between buyer and seller must benefit both sides.<br />Video<br />
Surplus<br />Shortage<br />Surplus – quantity supplied is greater than quantity demanded<br /> - Will drive the price down. Items will go on “sale”.<br />Shortage – quantity demanded is greater than quantity supplied - Will drive the price up.<br />Equilibrium price – price where quantity supplied is equal to the quantity demanded<br />
Explaining and Predicting Prices<br />Energy Prices<br /> Change in Demand <br />Food Prices<br /> Change in Supply<br />
6-3: Social Goals and Market Efficiency<br />More renters will be able to afford an apartment in the city, driving quantity demanded up.<br />Landlords will try to convert some apartments to other uses with higher returns, driving quantity supplied down.<br />Creates a shortage in the market.<br />Landlords will try to lower costs by providing the absolute minimum upkeep.<br />Prices no longer allocate apartments.<br />Landlords will create long waiting lists and other non-price criteria to discourage applicants such as excluding pets or children.<br />Video<br />Price Ceilings<br />Rent controls make housing more affordable.<br />Shortage<br />
Price Floor<br />Lowest legal price that can be paid for a good or a service.<br /> Minimum wage is a price floor.<br />More people are willing to work at the higher wage, driving quantity supplied up.<br />Employers will be unable to hire as many people at the higher wage, driving demand down.<br />Increases unemployment.<br />Creates a labor surplus in the market.<br />However, it does raise poor people’s incomes and provides a small measure of equity, one of our economic goals.<br />Tradeoff of full employment vs. economic equity.<br />Surplus<br />
Government sets a target price, or price support, for agricultural products. <br />Farmer sells his product at market price, and the government makes a deficiency payment to the farmer for the difference between the market price and the target price. <br />Soil Bank Program is a program where the government pays farmers to take land out of production, shifting supply curve to the left.<br />Benefits:<br />Guarantees a minimum return on farmer’s investment.<br />Encourages farmers to keep production up and prices stable.<br />Keeps small farmers in business.<br />Small farmers take better care of the land because it is a major part of their wealth.<br />Agricultural Price Supports<br /> Government programs help stabilize prices for farmers. <br />Target Price<br />