Prices provide important market signals to producers and consumers. They are determined through supply and demand and indicate value. Prices are generally flexible, neutral between parties, and convenient for exchange. However, monopolies and price controls can distort market signals and lead to inefficiencies by creating shortages or surpluses and reducing flexibility and competition.

1. Prices and Monopolies
Test #3

2. Price…
• Price- the monetary value of a product
established by supply and demand.
• Information signal
• It is a mode of communication

3. Prices…
• Neutral
• Results
• Flexible
• Free
• Regulatory
• Convenient

4. Prices…
• Neutral:
– They do not favor the consumer or producer
– We both team together to set the price
– 50/50- producers will only set the price at a point
where you will be willing to pay

5. Prices…
• Are Results:
– Competition between producers (and in some
cases consumers) is the foundation of price
setting.
– Not an arbitrary number
– Process to determine willingness

6. Prices…
• Flexible:
– Wants are usually fleeting passions
– Producers must make their money as fast as they
can
– Both sides of the coin are fickle

7. Prices…
• Free
– No outside source required to set price
– No cost to producer to list a price
– No cost to consumer to know a price

8. Prices…
• Regulatory
– In the economy you vote with your wallet
– Raises and lowering of price is dependent upon
demand/supply relationship
– Ability, willingness and desire
– Outside forces just make it harder to interpret

9. Prices…
• Convenient
– Fixed prices make monetary exchange easier
– No worry about best deal or fairness
– Ex. Car dealership
• Reputation of used car salesman?
• Do we look forward to going to them?
• Dealership vs. Grocery Store

10. Prices…
• Without them…
– No one feels like they get their fair share
• Rationing- government allocates resources
• Ration coupons- represents portions of your share
– Costs are high
– Incentives are low
– No information/signal

11. Prices…
• ___________
– Maximum legal price that can be charged for a product
– Creates huge/permanent shortages in supply
– False sense of market security
– Destroys ability to be flexible.
• ___________
– Lowest legal price that can be charged for a good or
service
– Leaves big surpluses in supply
– Ex. Minimum wage (does minimum wage really work?)

12. Terms:
• _______________-
– Prices are relatively stable, and QS is equal to QD
• ________________-
– QS is greater than QD
• ________________-
– QD is greater than QS
• _______________-
– Market is “Cleared”- no shortage and no surplus
at the end of trading period.

13. Competition
• _________________: “allow them to do”
– Government should be restricted to:
• Protecting private property
• Enforcing contracts
• Settling disputes
• Protecting national business from foreign competition.
• __________________:
– Individuals or small groups that run a market
– Change the competitive nature of business
• Forced the creation of unions
• __________________:
– Most products in the US
– Add small “unique” characteristics to similar products to be different.

14. Monopoly
• _________________:
– When cost minimization naturally leads to a single firm
producing a certain product
• _________________:
– When there is an absence of other sellers in a geographic area.
• _________________:
– Based on ownership or control of certain processes or
technologies
• Ex. Patenting a new invention.
• _________________:
– Government provided or approved
– Usually when the private sector cannot adequately or properly
provide a service
– Meant to prevent corruption/collusion.
– Softens the blow in America, we traditionally hate monopolies
even though they are needed sometimes.

15. Inadequacies…
• _______________:
– Inefficient resource allocation
– Prices and Output
• Prices rise, quality diminishes
– Power
• Ability to speak into government because of influence
– Failure of Demand side
• Monopolies need resources to produce goods
• Would you provide those goods to a market with only
one customer?

16. Inadequacies…
• ______________:
– Only one price means only one source of info
• __________________:
– One supplier (especially with jobs) means drastic
problems when companies close, or shift focus
• ________________:
– The bigger the company the harder it is to
change/maneuver.
– Inability to change = harder impact