Post on 26-Dec-2015
2. Flexible
Can absorb shock. War, disasters, weather. People adapt and adjust consumption & production.
4. No Administrative Cost —
No government cost,
No bureaucrats.
Competitive markets find their own prices.
Price adjusts peoples buying habits.
1. Rationing A system where the government decides
everyone’s fair share. Each person receives a ration coupon.
Rationing was used during WWII to allocate needed supplies to the war effort. It was also used in the 1970s when Oil supplies were severely restricted.
Problems with Rationing
1. Problem of Fairness- What is “fair”?
2. High Administrative Cost.3. Diminished Incentives. Everyone shares equally so why work?
How do individual businesses determine their prices ? 1. Their fixed, variable and start up
costs 2. The quantity demanded price
schedule
– (What would consumers demand at each and every price)
– For Example – Suppose you purchase 200 Harleys
at 10,000 dollars each. (The purchase of Harleys is a variable cost)
– Your fixed costs, and other variable costs for a month of your business total 30,000 dollars
– What would be the selling price of an individual Harley in order for you to meet your break even point ?
For your business projects
1. A working list of startup costs (One time purchases)
2. A working list of fixed costs (Rent, phone, etc. . )
3. A working list of variable costs (Labor, electricity etc. . .)
Economic Model Description of how the economy behaves and is expected
to perform in the future.
A set of assumptions (Table, Graphs, formulas) that analyze behavior and predict outcomes.
Economists use it to make predictions. Business use it to set and initial price on products.
Used to estimate the future of markets, products, etc.
Market EquilibriumPrice stability - Where demand equals
supply. The quantities are in equilibrium.
P 20 15
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Seller wants a higher price than the buyer wants to pay.They negotiate a price in the middle. Market equilibrium has been set.
Day One- Surplus(Review) Surplus — quantity supplied is greater
than quantity demanded at a given price.
P 20 15
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Surplus Price
Difference BetweenSurplus Price andEquilibrium Price is 10
Day Two- Shortage
(Review) Shortage — quantity supplied is less than quantity demanded - at a given price
P 20 15
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Shortage Price
Difference BetweenShortage Price andEquilibrium Price is 5
Day Three- Lower Surplus
P 20 15
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Surplus Price
Difference BetweenSurplus Price andEquilibrium Price is 5
Day 4- Equilibrium Reached
Quantity supplied equals quantity demanded; price that clears the market.P 20 15
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Loss Leader-item sold below cost to attract customers.
P 20 15
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Equilibrium Price Sellers Cost
Loss Leader Price
How do surpluses and shortages help the market find the equilibrium price?
Answer the following questions in complete sentences.
How do retail merchants move product that is overstocked?
What has this got to do with Equilibrium Price?
Why do American farmers consistently produce surplus crops?
Government policy.
Who pays? Is this Good?
Price Ceilings
Price Ceiling- A maximum price that can be charged for a product. P 20 15
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Price Ceiling
A way to remember- you lookup at a Ceiling, Prices want togo up with a Ceiling
Practical Examples of Price Ceilings Apartment Rents in large Cities
San Francisco- North Beach1 BR 1 BA, $900
Chicago, IL 1 BR 1BA $1200 Sacramento 1bd,1ba $925
Disadvantage of Price Ceilings on Apartments 1. Landlords will turn apartments into
offices or condominiums 2. Permanent shortage created for
consumers 3. Landlords will reduce costs by reducing
upkeep expenses.
Price Floors
Price Floor- A minimum price that can be charged for a product. P 20 15
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Price Floor
A way to remember- you look down at a Floor, Prices want to go down with a Floor
Practical Example of Price Floors
Minimum Wage7.507.006.506.005.505.004.504.003.50
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Equilibrium Price
Price Floor
With the current minimum wage, is there a surplus or shortage of workers ?
7.507.006.506.005.505.004.504.003.50
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Equilibrium Price
Price Floor