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Section 1-Preview

Section PreviewIn this section, you will learn that prices act as signals that help us allocate scarce resources.

Section 1-Key Terms

Content Vocabulary• price

• rationing

• ration coupon

• rebate

Academic Vocabulary• neutral • criteria

Section 1

Prices as Signals• Price is a signal, giving information to

buyers and sellers.

– High prices—buyers buy less and producers produce more.

– Low prices—buyers buy more and producers produce less.

Section 1

Advantages of PricesPrices help the economy run smoothly by providing a good way to allocate resources.

Section 1

• Prices help consumers and producers make decisions on WHAT, HOW, and FOR WHOM:

– In a competitive market, prices are neutral.

– Prices in a market economy are flexible.

Advantages of Prices (cont.)

The Global Economy & YOUAverage Laptop Prices

Section 1

– Prices are familiar and easy to understand.

– Prices have no cost of administration.

Advantages of Prices (cont.)

The Global Economy & YOUAverage Laptop Prices

Section 1

Allocations Without Prices Rationing has disadvantages that are not present in the price system.

Section 1

• Without a price system, a rationing system might be used.

• Individuals receive a ration coupon to obtain a product.

Allocations Without Prices (cont.)

Section 1

• Problems with rationing

– Difficult to allocate in fair way

– Administrative cost of rationing

– Negative incentive to produce

Allocations Without Prices (cont.)

Allocation of Resources Prices are signals that help buyers and sellers make economic decisions. Without prices, societies must find other ways to allocate resources.

VS 1

Section 1

Prices as a System Prices connect all markets in an economy.

Section 1

• Prices help individuals make decisions and serve as signals in allocating resources between markets.

– Higher oil prices have affected producer and consumer decisions.

– Oil is inelastic; higher costs leave individuals with less to spend.

Prices as a System (cont.)

Section 1

– SUV sales dropped; manufacturers offered a rebate.

– Manufacturers reduced production, closed plants, laid off workers.

– Employees find jobs in new industries.

Prices as a System (cont.)

Figure 2

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Market Equilibrium When buyers and sellers can freely make production and purchase decisions, the price of a product will move toward market equilibrium. At this point, the quantity supplied is exactly equal to the quantity demanded.

Section 1

• The adjustment process was a natural and necessary shift of resources for a market economy.

Prices as a System (cont.)

Profiles in Economics:Margaret (Meg) Whitman

Section 2-Preview

Section PreviewIn this section, you will learn how economic models help us understand prices in competitive markets.

Section 2-Key Terms

Content Vocabulary• economic

model

• equilibrium price

• surplus

• shortage

Academic Vocabulary• voluntary • fluctuates

Section 2

The Price Adjustment Process In a market economy, prices seek their own equilibrium.

Section 2

The Price Adjustment Process (cont.)

• Transactions in a market economy are voluntary, so compromises between buyers and sellers must benefit both.

• An economic model is used to analyze behavior and predict outcomes.

Section 2

• Supply and demand curves intersect to form the equilibrium price.

– A surplus is any unsold product on store shelves or in warehouses.

– Sellers lower prices to attract more buyers.

The Price Adjustment Process (cont.)

Market Equilibrium

Section 2

– A shortage exists when supply does not meet demand.

– Prices and quantities will go up to meet demand.

The Price Adjustment Process (cont.)

Surpluses and Shortages

Section 2

• When the equilibrium price is found, there is no shortage or surplus during the market period.

• Factors may come along to disturb the equilibrium price, then shortages and surpluses will appear again to find a new equilibrium level.

The Price Adjustment Process (cont.)

Surpluses and Shortages

Figure 3

Section 2

Explaining and Predicting Prices Changes in supply and demand can result in changes in prices.

Section 2

• A change in price is normally caused by

– A change in supply

– A change in demand

– A change in supply and demand

Explaining and Predicting Prices (cont.)

Changes in Prices

Figure 4

Section 2

• Predictions can be made if we know the elasticity of each curve and the underlying factors that cause the supply and demand curves to change.

• A competitive market is one that “runs itself,” finding its own equilibrium.

• Questions of WHAT, HOW, and FOR WHOM are decided by the buyers and sellers.

Explaining and Predicting Prices (cont.)

Section 3-Preview

Section PreviewIn this section, you will learn that governments sometimes use policies that interfere with the market in order to achieve social goals.

Section 3-Key Terms

Content Vocabulary• price ceiling

• minimum wage

• price floor

• target price

• nonrecourse loan

• deficiency payment

Academic Vocabulary• arbitrarily • stabilize

Section 3

Distorting Market Outcomes Price ceilings and price floors prevent prices from allocating goods and resources.

Section 3

Distorting Market Outcomes (cont.)

• Sometimes the price system cannot accurately inform buyers and sellers in the market.

Section 3

Distorting Market Outcomes (cont.)

• Price ceiling advantages

– Some individuals are happy.

– Individuals who could not afford the market price not may be eligible.

Price Ceilings

Figure 5

Section 3

• Price ceiling disadvantages

Distorting Market Outcomes (cont.)

– Demand becomes too high.

– Suppliers face lower profits.

– Suppliers limit service or leave market altogether.

Price Ceilings

Section 3

• Price floor– Minimum wage is an example.

Distorting Market Outcomes (cont.)

Price Floors

1. The BIG Idea Explain why a government would consider imposing a price ceiling or price floor.2. Analyzing Visuals Look at Figure 6.4 on p. 157. How does the price ceiling affect the relationship between quantity supplied and quantity demanded? Why does the price ceiling make this relationship permanent?

Price Ceilings

Figure 6

Section 3

Agricultural Price Supports Government programs to help stabilize prices for farmers have both positive and negative effects.

Section 3

• During the Great Depression of the 1930s, farm prices fell much further than other prices in the economy.

• Federal government established the Commodity Credit Corporation (CCC) to help farmers.

Agricultural Price Supports (cont.)

Section 3

• Under the CCC support programs

– A target price was established to help stabilize farm prices.

– Loan supports like the nonrecourse loan were available.

– Farmers received a deficiency payment.

Agricultural Price Supports (cont.)

Deficiency Payments

Section 3

• Agricultural output increased greatly over time, as did the number of farmers.

• Government wanted farmers to stop farming—the Conservation Reserve Program of 1985 pays farmers not to farm.

Agricultural Price Supports (cont.)

Section 3

• Efforts to make farming responsive to the market forces of supply and demand continue today with the Farm Security and Rural Investment Act of 2002.

Agricultural Price Supports (cont.)

3. Explaining Why did the federal government establish agricultural price support programs?4. Predicting What would happen if the government eliminated all farm subsidies?5. Deciding Should the government eliminate all farm subsidies? Explain your reasoning.

Section 3

When Markets Talk Markets send signals when prices change in response to events.

Section 3

• Markets bring buyers and sellers together.

• Markets are said to “talk” when prices in them move up or down significantly in reaction to events that take place elsewhere in the economy.

When Markets Talk (cont.)

VS 3

Social Goals and Prices The social goals of equity and security sometimes can be achieved only by giving up parts of other goals. Price ceilings or price floors can help achieve these goals, but they may result in fewer goods and services offered overall.