1. Price and Decision Making

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. 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. The Advantages
• Serve as link between producers and
consumers.
• They perform an allocation function for
four reasons

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. 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. 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. 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. 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. 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. 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. Surpluses and Shortages
• Surplus occurs when
the qty. supplied is
more than qty.
demanded.
Figure 6.2aFigure 6.2a

13. Surpluses and Shortages
• Shortages are where
qty. demanded is more
than the qty. supplied.
Figure 6.2bFigure 6.2b

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. 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. 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. • 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. 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. 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. 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. 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. 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. Loan Supports
• Farmers borrow
money from
Commodity Credit
Corp. (CCC) at a
target price.
• Most are nonrecourse
loans.
Figure 6.6aFigure 6.6a

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. 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.