CHAPTER 6

PRICES AND DECISION MAKING

6.2 “The Price System at Work”

Thailand TWO-price system

Quick recap: In a market economy, prices adjust

Moving on…

Market Equilibrium

A situation when prices are relatively stable, and the quantity of goods or services supplied is equal to the quantity demanded.

True or False? Companies are closer to selling their products at

the equilibrium price when their product first goes on the market vs. after the product has been on the market for awhile.

Why is it false? When an equilibrium price is found, it tends to

stay there.

Surplus v. Shortage Quantity demanded is greater than supplied Quantity supplied is less than the quantity

demanded BOTH ARE SHORTAGES!

Which one causes the price to increase? Decrease?

Chart: Factors Affecting Price Changes in Agriculture

http://www.glencoe.com/sec/socialstudies/economics/econprinciples2001/pdfs/C06-03C-820487.pdf

Which one shows mostly inelastic supply AND demand?

The other chart shows an ELASTIC __________ curve. (supply or demand)

The importance of elasticity True or False: Price changes in any given

market are likely to be wider if both supply and demand are ELASTIC.

FALSE!!! Let’s go back to the chart…

Price question

Why is the price of gas more expensive near a freeway?

Portland returning car story

CHAPTER 6

PRICES AND DECISION MAKING

6.3 “Social Goals vs. Market Efficiency”

7 Economic & Social Goals Most People Seem to Share:

Which TWO are the LEAST compatible with a market economy? Efficiency Economic Growth Equity Full Employment Freedom Price Stability Security

DISTORTING market outcomes

Price ceilings: Max. legal price that can be charged

Price floors: Lowest legal price that can be paid

PRICE CEILINGS

When could it be used? NYC – Rent controls to make housing more

affordable for long-term residents Hypothetical situation

Rent – Gov’t dictates that apartments could rent for only $1,000/mo

Who would this help? Who would this hurt? What would you do if you were the owner/landlord?

Change function of building? Incentive for adding more units?

Costa Rica – Rent can’t go up for 3 years Good idea? Bad idea?

PRICE FLOORS What is the most common example of a price floor? MINIMUM WAGE!MINIMUM WAGE! Who does this help? Who does this hurt?

Lowest wages in this area—Would employer pay less if he/she could?

Does this create more unemployment? What do you think? Let’s take a look

Equity v. efficiency Minimum Wage in the U.S.

http://www.dol.gov/esa/minwage/america.htm

REAL v. NOMINAL?

Minimum Wage & Unemployment

On a supply & demand curve, which will be the price ceiling? Which

will be the price floor?