Price

Prices as Signals

Signals- a sign to help in making a decision

Advantages of Prices

1. Neutral

Does not favor consumer or producer. The more competition the more

efficient

2. Flexible

Can absorb shock. War, disasters, weather. People adapt and adjust consumption & production.

3. Freedom of Choice

There are Substitutions. Freedom to decide to buy.

4. No Administrative Cost —

No government cost,

No bureaucrats.

Competitive markets find their own prices.

Price adjusts peoples buying habits.

5. Efficient

people naturally understand prices

Allocations without Prices

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 your Business Projects 1. You need to know your costs in order to

figure out your prices.

– 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. . .)

Market Price System How Prices are Determined in a Market

How are prices determined in a competitive market.

The Adjustment Process - Price determination.

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.

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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.

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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

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Shortage Price

Difference BetweenShortage Price andEquilibrium Price is 5

Day Three- Lower Surplus

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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.

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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?

Social Goals

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

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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

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Equilibrium Price

Price Floor

If there was no minimum wage, what would happen to unemployment numbers?

How do businesses compensate for minimum wage laws ?

Government Price Supports

Agricultural supports The CCC- Commodity Credit Corporation:

creates a target price for farmers.

Loan Supports- Nonrecourse loans- a loan that does not carry a penalty or an obligation to repay the loan