SFLS Price mechanism

1. Functions of the Price Mechanism

2. What Economics is
Economics is a social science, attempting to study
people, their behavior, and the choices that they make.
Definition:
1.) What to produce.
2.) How much to produce.
3.) How to produce it.
4.) Who to produce it for.
So economics is
about answering
these questions….

3. Ways to interpret Economic theory
Positive economics
is the study of what is
结果是基于数据
Normative economics
is the study of what should be
是基于你的愿望是什么结果
And there are these
two ways to view
things…

4. You ever stop and think about how
amazing it is that this world works
together the way it does? isn’t it amazing
that we have the things we do, that
strangers all over the world are will to
work together to provide things for each
other?

5. Coffee and Sugar pics of me
Take coffee for example. I, super,
super, super, love coffee…

6. It wouldn’t be possible for me to
have it without a system that
combines people from all over the
world to provide it.

7. Another way to look at it, is exactly how
somethings get done. For example, we
usually think governments provide
trains, right? But is that always the case?

8. Governments don’t invent trains.
Private individuals with a goal, they
invent trains.

9. So here is a question:
What is the best way to allow people of
the world to achieve the things they want?

10. 1.) Command economy
- Government plays the
central role in market
decision making
i.) What to produce.
ii.) How much to produce.
iii.) How to produce it.
iv.) Who to produce it for.
Determined by
Government
preferences.
This is one way to
answer it...

11. 2.) Free market economy
- Decisions about how to
allocate resources are left up
to people themselves
i.) What to produce.
ii.) How much to produce.
iii.) How to produce it.
iv.) Who to produce it for.
Determined by
consumers preferences
Determined by
producers seeking profits
Determined by
purchasing power
This is the other way, and
the one that we will
describe.

12. Question:
There are different ways to view things
and different ways to ask, and answer,
questions. So we will ask a slightly
different question about what we have
studied so far…

13. How are prices determined?
Question:
This is the way we’ve asked the question so far
with the supply and demand that we have studied.
Answer:

14. How are prices determined?
Question:
And this is the way
we have viewed it.
Answer:
Positive economics
is the study of what is
结果是基于数据
Supply and Demand Baby!

15. How are prices determined?
Question:
What do prices do?
Question:
To ask the question in a slightly different way...

16. Adam Smith’s famous book
The Wealth of Nations
“invisible hand of the price mechanism”
in which the hidden-hand of the market
operating in a competitive market
through the pursuit of self-interest
allocated resources in society’s best
interest.
This is similar to how Adam Smith asked this
question and tried to answer it.

17. How are prices determined?
Question:
Supply and Demand – Market Equilibrium
Answer:
Positive economics
is the study of what is
结果是基于数据
Normative economics
is the study of what should be
是基于你的愿望是什么结果
1st question

18. What do prices do?
Question:
The functions of the price mechanism
Answer:
Positive economics
is the study of what is
结果是基于数据
Normative economics
is the study of what should be
是基于你的愿望是什么结果
2nd question

19. The Price Mechanism
- describes the means by which millions of
decisions taken by consumers and
businesses interact to determine the
allocation of scarce resources between
competing uses.
Price Mechanism

20. 1.) Signaling Function
Functions of the Price Mechanism
- They adjust to where
resources are required, and
where they are not.
- Prices rise and fall to reflect
scarcities and surpluses.

21. Price
Quantity
70 10 1513 17
$2.00
1.75
1.50
1.25
1.00
0.75
0.50
Supply
Demand
E Equilibrium
1.) Signaling Function
Demand
If prices are rising because
of high demand from
consumers, this is a signal
to suppliers to expand
production to meet the
higher demand
New Equilibrium

22. Price
Quantity
70 10 1513 17
$2.00
1.75
1.50
1.25
1.00
0.75
0.50
Supply
Demand
E Equilibrium
S
If there is excess supply in
the market the price
mechanism will help to
eliminate a surplus of a
good by allowing the
market price to fall.
New Equilibrium
1.) Signaling Function

23. 70 10 1513 17
$2.00
1.75
1.50
1.25
1.00
0.75
0.50
Supply
Demand
9.1 11.5
E
Shortage
Quantity
demanded
Quantity
supplied
Price
Quantity
Shortage
A shortage is a
signal that the price
is too low.

24. 70 10 1513 17
$2.00
1.75
1.50
1.25
1.00
0.75
0.50
Supply
Demand
8.1 11.2
E
Surplus
Quantity
demanded
Quantity
supplied
Price
Quantity
Surplus A shortage is a
signal that the price
is too high.

25. 1.) Signaling Function
1.5)Transmission
of preferences
- Through their choices
consumers send information to
producers about the changing
nature of needs and wants.
Functions of the Price Mechanism

26. {
I assume you would
pay a large amount
for an iphone 6,
right?

27. {
Would you pay a lot
for an iphone 2?
Prices let producers
know your preference.

28. 1.) Signaling Function
2.) Incentives function
1.5.) Transmission of preferences
Functions of the Price Mechanism
Incentives matter!
For competitive markets to work
efficiently all ‘economic agents’
(i.e. consumers and producers)
must respond to appropriate
price signals in the market.

29. Price
Quantity
70 10 1513 17
$2.00
1.75
1.50
1.25
1.00
0.75
0.50
Supply
Demand
E Equilibrium
2.) Incentive Function
Demand
If prices are rising because
of high demand from
consumers, this give a
incentive to increase
production to meet the
higher demand.
New Equilibrium

30. {
Prices motivate behavior
to do, or not do, things.

31. 1.) Signaling Function
3.) Rationing function -Prices serve to ration scarce
resources when demand in a
market outstrips supply.
1.5.) Transmission of preferences
Functions of the Price Mechanism

32. Unlimited wants
Limited resources
Prices help figure
out how to deal
with this problem.

33. 1.) Signaling function
3.) Rationing function
1.5.) Transmission of
preferences
Prices transmit information about
changing resource scarcity and
changing consumer values.
Prices provide information
Functions of the Price Mechanism
2.) Incentive function

34. So to Summarize ….

35. 1.) Signaling function
3.) Rationing function
1.5.) Transmission of
preferences
Prices transmit information about
changing resource scarcity and
changing consumer values.
Prices provide information
Functions of the Price Mechanism
2.) Incentive function

36. However…

37. Prices don’t always work
Failures of the Price Mechanism
1.) Signaling function
3.) Rationing function
1.5.) Transmission of
preferences
2.) Incentive function

38. This system of prices
has allowed people to
do more, have more,
and make their lives
better…

39. This system we have
works amazingly
well, but it is not
perfect…

40. {
It doesn’t mean
everyone is equal…

41. And not everyone has the same
information to respond in good ways.

42. The price system, is a system no one designed. It
is a collect of experiences how humans interact
with each other and is one of the most amazing
things humans have created.

43. As great and amazing as it is, it is still
not perfect…
The price system, is a system no one designed, it
is a collect of experiences how humans interact
with each other and is one of the most amazing
things humans have created.

44. As great and amazing as it is, it is still
not perfect…
The price system, is a system no one designed, it
is a collect of experiences how humans interact
with each other and is one of the most amazing
things humans have created.
In the next few topics, we will examine
some of the failure and attempts to
overcome them.

45. The End
Thank you
