Splash Screen Chapter 6 Prices and Decision Making

Splash Screen Chapter 6 Prices and Decision Making

Economics You Chapter and Introduction 1 What factors do you consider when you need to make a decision to buy something? Price may be one of the most important factors of all. In this chapter, you will learn how price serves as a signal to both buyers and sellers. Click the Speaker button to listen to Economics and You. 2

Chapter Objectives Chapter Introduction Section 1: Prices as Signals 2 • Explain how prices act as signals. • Describe the advantages of using prices as a way to allocate economic products. • Understand the difficulty of allocating scarce goods and services without using prices. Click the mouse button or press the Space Bar to display the information. 3

Chapter Objectives Chapter Introduction 3 Section 2: The Price System at Work • Understand how prices are determined in competitive markets. • Explain how economic models can be used to predict and explain price changes. • Apply the concepts of elasticity to changes in prices. Click the mouse button or press the Space Bar to display the information. 4

Chapter Objectives Chapter Introduction 4 Section 3: Social Goals vs. Market Efficiency • Describe the consequence of having a fixed price in a market. • Explain how loan supports and deficiency payments work. • Understand what is meant when “markets talk. ” Click the mouse button or press the Space Bar to display the information. 5

End of Chapter Introduction Click the mouse button to return to the Contents slide.

Study Guide (cont. ) Section Key Terms 1 -2 – price – ration coupon – rationing – rebate Objectives After studying this section, you will be able to: – Explain how prices act as signals. – Describe the advantages of using prices as a way to allocate economic products. – Understand the difficulty of allocating scarce goods and services without using prices. Click the mouse button or press the Space Bar to display the information. Section 1 begins on page 137 of your textbook. 7

Study Guide (cont. ) Section 1 -3 Applying Economic Concepts Rationing Have you and your friends ever tried to share something–a candy bar, cake, or pizza –when there really wasn’t enough to go around? What are different ways to make allocations? Click the Speaker button to listen to the Cover Story. Section 1 begins on page 137 of your textbook. 8

Introduction Section 1 -4 • Life is full of signals that help us make decisions. • For example, when we pull up to an intersection, we look to see if the traffic light is green, yellow, or red. • We look at the other cars to see if any have their blinkers on, and in this way we receive signals from other drivers regarding their intentions to turn. Click the mouse button or press the Space Bar to display the information. 9

Introduction (cont. ) Section 1 -4 • Doctors even tell us that pain is a signal that something is wrong with our body and may need attention. • But have you ever thought about the signals that help us make our everyday economic decisions? • It turns out something as simple as a price–the monetary value of a product as established by supply and demand–is a signal that helps us make our economic decisions. Click the mouse button or press the Space Bar to display the information. 10

Introduction (cont. ) Section 1 -4 • Prices communicate information and provide incentives to buyers and sellers. • High prices are signals for producers to produce more and for buyers to buy less. Low prices are signals for producers to produce less and for buyers to buy more. Click the mouse button or press the Space Bar to display the information. 11

Did You Section Know? 1 -4 • During the oil crisis in the early 1970 s, the proposed gas rationing program raised serious differences of opinion among Americans. Some people argued that every adult American should get the same number of gas rationing coupons. Others argued that owners of newer, more fuelefficient cars would not need as many coupons as owners of older, gas-guzzling models. Click the mouse button or press the Space Bar to display the information. 12

Advantages of Prices Section 1 -5 • Prices are neutral because they do not favor the buyer or the consumer. They are the result of competition. • Prices are flexible, allowing for the “shocks” of unforeseen events and changes in the market. • Prices have no administration costs. • Prices are familiar and easily understood. Click the mouse button or press the Space Bar to display the information. 13

Discussion Question Section 1 -Assessment 1 In your opinion, why does the neutrality of prices stimulate competition? Students answers will vary but should indicate an understanding that buyers pay the price because they choose to accept it; otherwise, they would go to another producer with a lower price and buy there. Click the mouse button or press the Space Bar to display the answer. 14

End of Section 1 Click the mouse button to return to the Contents slide.

Allocations Without Prices Section 1 -8 • Rationing, or the system where the government decides everyone’s “fair” share, leads to the question of fairness. • Rationing leads to high administrative costs. • Rationing leads to fewer incentives to work and produce. Click the mouse button or press the Space Bar to display the information. 16

Discussion Question Section 1 -Assessment 1 Imagine that no matter how much you studied, you already knew you were going to get a “B” in Economics. How would this affect your incentive to study? Students should indicate that in school, the grade is often the incentive; therefore, knowing the grade beforehand could be detrimental to the student. Click the mouse button or press the Space Bar to display the answer. 17

Study Guide (cont. ) Section Key Terms – economic model 2 -2 – shortage – market equilibrium – equilibrium price – surplus Objectives After studying this section, you will be able to: – Understand how prices are determined in competitive markets. – Explain how economic models can be used to predict and explain price changes. – Apply the concepts of elasticity to changes in prices. Click the mouse button or press the Space Bar to display the information. Section 2 begins on page 142 of your textbook. 18

Study Guide (cont. ) Section 2 -3 Applying Economic Concepts Equilibrium Price When something is at equilibrium, it tends to remain at rest. What causes prices to reach, and then stay at, equilibrium? Click the Speaker button to listen to the Cover Story. Section 2 begins on page 142 of your textbook. 19

Introduction (cont. ) Section 2 -4 • Buyers want to find good buys at low prices. Sellers hope for high prices and large profits. • Neither can get exactly what they want, so some adjustment is necessary to reach a compromise. Click the mouse button or press the Space Bar to display the information. 20

The Price Adjustment Section 2 -6 Process • Together, demand supply make a complete picture of the market. • Price adjustments help a competitive market reach market equilibrium, with fairly equal supply and demand. Click the mouse button or press the Space Bar to display the information. 21

The Price Adjustment Section 2 -8 Process (cont. ) Click the mouse button or press the Space Bar to display the information. 22

The Price Adjustment Process (cont. ) Section 2 -11 • Surpluses occur when supply exceeds demand. Click the mouse button or press the Space Bar to display the information. 23

The Price Adjustment Process (cont. ) Section 2 -13 • Shortages occur when demand exceeds supply. Click the mouse button or press the Space Bar to display the information. 24

The Price Adjustment Process (cont. ) Section 2 -15 • The equilibrium price is the price at which supply meets demand. Click the mouse button or press the Space Bar to display the information. 25

The Price Adjustment Process (cont. ) Section 2 -16 Click the mouse button or press the Space Bar to display the information. 26

Discussion Question Section 2 -Assessment 1 Imagine that you want to go to a concert but you find it is sold out at ticket outlets. What effect will this shortage of tickets have on the price of any remaining concert tickets? Their price will increase. Click the mouse button or press the Space Bar to display the answer. 27

Explaining and Predicting Section 2 -20 Prices • A change in price is normally the result of a change in supply, a change in demand, or both. Click the mouse button or press the Space Bar to display the information. 28

Explaining and Predicting Section 2 -22 Prices (cont. ) • Even small changes in an inelastic supply can create big changes in price. Click the mouse button or press the Space Bar to display the information. 29

Discussion Question Section 2 -Assessment 1 U. S. soybean farmers had a recordhigh harvest in 1998. What likely effect did the increase in the supply of soybeans have on their price? Students should indicate that the price of soybeans dropped dramatically. Click the mouse button or press the Space Bar to display the answer. 30

The Competitive Theory Section Price 2 -30 • The theory of competitive pricing represents a set of ideal conditions and outcomes; it serves as a model to measure market performance. • In theory, a competitive market allocates resources efficiently. • 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. Click the mouse button or press the Space Bar to display the information. 31

Discussion Question Section 2 -Assessment 1 Why do experts say that a market economy is one that “runs itself”? A market economy offers a climate where buyers and sellers set prices; there is no need for a bureaucracy or planning commission. Click the mouse button or press the Space Bar to display the answer. 32

Section Assessment Section 2 -Assessment 1 Main Idea Explain how a change in demand can affect prices. Changes in income, tastes, and so on affect demand and, therefore, price. Click the mouse button or press the Space Bar to display the answer. 33

Section Assessment (cont. ) Section 2 -Assessment 2 Describe how prices are determined in a competitive market. Prices are adjusted through competition between buyers and sellers. Click the mouse button or press the Space Bar to display the answer. 34

Section Assessment (cont. ) Section 2 -Assessment 4 Explain how different cases of demand supply elasticity are related to price changes. The more elastic, the smaller the price change; the less elastic, the larger the price change. Click the mouse button or press the Space Bar to display the answer. 35

Section Assessment (cont. ) Section 2 -Assessment 5 Understanding Cause and Effect What signal does a high price send to buyers and sellers? A high prices tells buyers that they should buy less and tells sellers they should offer more. Click the mouse button or press the Space Bar to display the answer. 36

Section Assessment (cont. ) Section 2 -Assessment 6 Making Inferences What do merchants usually do to sell items that are overstocked? What does this tell you about the equilibrium price for the product? They lower the price of the items. The equilibrium price is lower than the present price. Click the mouse button or press the Space Bar to display the answer. 37

End of Section 2 Click the mouse button to return to the Contents slide.

Study Guide (cont. ) Section Key Terms 3 -2 – price ceiling – target price – minimum wage – nonrecourse loan – price floor – deficiency payment Objectives After studying this section, you will be able to: – Describe the consequence of having a fixed price in a market. – Explain how loan supports and deficiency payments work. – Understand what is meant when “markets talk. ” Click the mouse button or press the Space Bar to display the information. Section 3 begins on page 150 of your textbook. 39

Study Guide (cont. ) Section 3 -3 Applying Economic Concepts Price Floor Chances are that you have worked for the minimum wage at some time in your life. Why is this an example of a price floor? Click the Speaker button to listen to the Cover Story. Section 3 begins on page 150 of your textbook. 40

Did You Section Know? 3 -5 • During the nation’s Great Depression, prices for farm products tumbled. Farmers lost much money, and many even lost their farms. At the same time, the farms produced surplus crops. To combat this, in 1933, the government passed the Agricultural Adjustment Act. In part, this act authorized payments to farmers who agreed to reduce the acreage they farmed. This effectively reduced the crop surplus and boosted farmer income. Click the mouse button or press the Space Bar to display the information. 41

Distorting Market Outcomes Section 3 -6 • Achieving equity and security (two of the seven broad economic and social goals) usually requires policies that distort market outcomes. • One way to achieve these goals is to set “socially desirable” prices, which interferes with the pricing system. • Setting price ceilings affects the allocation of resources. • The minimum wage is an example of a price floor. Click the mouse button or press the Space Bar to display the information. 42

Distorting Market Outcomes (cont. ) Section 3 -7 Click the mouse button or press the Space Bar to display the information. 43

Distorting Market 3 -12 Outcomes (cont. ) Section Click the mouse button or press the Space Bar to display the information. 44

Agricultural Price 3 -15 Supports Section • Government loan support was offered in the 1930 s through Commodity Credit Corporation to help stabilize agricultural prices. The CCC loan program led to food surpluses. • The CCC switched to deficiency payments, which prevented the government from holding surplus food and had farmers sell their crops on the open market. Click the mouse button or press the Space Bar to display the information. 45

Agricultural Price 3 -15 Supports (cont. ) Section • In 1996, Congress passed FAIR—Federal Agricultural Improvement and Reform Act. Cash payments replaced price supports and deficiency payments. The payments ended up costing as much. In 2002, farmers will no longer receive any kind of payments. Click the mouse button or press the Space Bar to display the information. 46

Discussion Question Section 3 -Assessment 1 In your opinion, which kind of price support provides farmers with the most incentive to sell their crops at the highest possible price? Answers will vary but students may point out that government makes up the price difference, offering little incentive to farmers. Click the mouse button or press the Space Bar to display the answer. 47

When Markets Talk Section 3 -21 • Markets “talk” when prices move up or down dramatically. • Buyers and sellers respond to changes in the market through their decisions. Click the mouse button or press the Space Bar to display the information. 48

Discussion Question Section 3 -Assessment 1 Think of the last item you decided not to buy. What message did your decision send to the manufacturer? That something about the product or its value was not worth the price. Click the mouse button or press the Space Bar to display the answer. 49

Section Assessment Section 3 -Assessment 1 Main Idea Using your notes from the graphic organizer activity on page 150 of your textbook, describe why price ceilings are often set. Price ceilings are set to achieve equity and security. Click the mouse button or press the Space Bar to display the answer. 50

Section Assessment (cont. ) Section 3 -Assessment 3 Explain how loan supports and deficiency payments work. Loan supports allow farmers to borrow against crops. Deficiency payments supply farmers with checks for the difference between the target price and the actual price. Click the mouse button or press the Space Bar to display the answer. 51

Section Assessment (cont. ) Section 3 -Assessment 6 Understanding Cause and Effect The price of fresh fruit over the course of a year may go up or down by as much as 100 percent. Explain the causes for these changes in terms of changes in demand, changes in supply, and the elasticity of demand for fresh fruit. Supply is affected by seasons and by weather. Because demand tends to be stable and slightly inelastic, a change in supply can cause a large change in price. Click the mouse button or press the Space Bar to display the answer. 52

Section Close Section 3 -Assessment 7 Prices can be viewed as signals. Create a logo or symbol that illustrates this idea. 53

End of Section 3 Click the mouse button to return to the Contents slide.

Section 1: Prices as Signals 1 Chapter Summary • Prices serve as signals to both producers and consumers. In doing so, they help decide three basic WHAT, HOW, and FOR WHOM questions that all societies face. • High prices are signals for businesses to produce more and for consumers to buy less. Low prices are signals for businesses to produce less and for consumers to buy more. • Prices have the advantages of neutrality, flexibility, efficiency, and clarity. Click the mouse button or press the Space Bar to display the information. 55

Section 1: Prices as Signals 2(cont. ) Chapter Summary • Other nonprice allocation methods such as rationing can be used. Under such a system, people receive ration coupons, which are similar to tickets or receipts that entitle the holder to purchase a certain amount of a product. • Nonprice allocation systems suffer from problems regarding fairness, high administrative costs, and diminished incentives to work and produce. • A market economy is made up of many different markets, and different prices prevail in each. A change in price in one market affects more than the allocation of resources in that market. It also affects the allocation of resources between markets. Click the mouse button or press the Space Bar to display the information. 56

Section 2: The. Summary Price System Chapter 3 at Work • Economists often use an economic model to help analyze behavior and predict outcomes. Models of economic markets are often represented with supply and demand curves in order to examine the concept of market equilibrium, a situation in which prices are relatively stable, and the quantity of output supplied is equal to the quantity demanded. • In a competitive market, prices are established by the forces of supply and demand. If the price is too high, a temporary surplus appears until the price goes down. If the price is too low, a temporary shortage appears until the price rises. Eventually the market reaches the equilibrium price where there is neither a shortage nor a surplus. Click the mouse button or press the Space Bar to display the information. 57

Section 2: The. Summary Price System Chapter 4 at Work (cont. ) • A change in price can be caused by a change in supply or a change in demand. The size of the price change is affected by the elasticity of both curves. The more elastic the curves, the smaller the price change; the less elastic the curves, the larger the price change. • The theory of competitive pricing represents a set of ideal conditions and outcomes. The theory serves as a model by which to measure the performance of other, less competitive markets. Because of this, absolutely pure competition is not needed for theory of competitive pricing to be practical. Click the mouse button or press the Space Bar to display the information. 58

Section 3: Social Goals vs. 5 Market Chapter Summary Efficiency • Governments sometimes fix prices at levels above or below the equilibrium price to achieve the social goals of equity and security. • If the fixed price is a price ceiling, as in the case of rent controls, a shortage usually appears for as long as the price remains fixed below the equilibrium price. • Agricultural price supports were introduced during the 1930 s to support farm incomes. Nonrecourse loan support programs allowed farmers to borrow against crops, and then keep the loan and forfeit the crop if market prices were low. Click the mouse button or press the Space Bar to display the information. 59

Section 3: Social Goals vs. 6 Market Chapter Summary Efficiency (cont. ) • Later, deficiency payments were used, supplying the farmer with a check that made up the difference between the target price and the actual price received for the product. 60

End of Chapter Summary Click the mouse button to return to the Contents slide.

Identifying Terms Chapter. Key Assessment 1 Identify the key term that is an effect of the five causes stated below. Some causes may have more than one effect. Cause: The government tries to keep prices down by D legislating price ceilings. Effect: ______ Cause: The government wants to allocate scarce goods and services without the help of a price A system. Effect: ______ Cause: A reasonably competitive market is experiencing alternating, yet consecutively smaller, surpluses and E shortages. Effect: ______ A. rationing B. economic model C. surplus D. shortage E. equilibrium price F. loss leader G. price ceiling H. price floor Click the mouse button or press the Space Bar to display the answer. The Chapter Assessment is on pages 158– 159. 62

Identifying Terms (cont. ) Chapter. Key Assessment 2 Identify the key term that is an effect of the five causes stated below. Some causes may have more than one effect. Cause: People decide that farmers should receive a higher price for milk and cheese, so a price floor for these C products is established. Effect: ______ Cause: A market is at equilibrium, but the product falls out of style before producers can reduce production. C Effect: ______ A. rationing B. economic model C. surplus D. shortage E. equilibrium price F. loss leader G. price ceiling H. price floor Click the mouse button or press the Space Bar to display the answer. 63

Reviewing Facts Chapterthe Assessment 4 Describe four advantages of using price as an allocating mechanism. Prices are neutral, favoring neither producer nor consumer, and flexible, allowing the market economy to accommodate change. Prices have no administrative costs and are efficient because they are understood by all. Click the mouse button or press the Space Bar to display the answer. 64

Reviewing Facts (cont. ) Chapterthe Assessment 5 List three problems of allocating goods and services using nonpricerelated methods. establishing fair system of allocation; cost of administering system; negative impact system has on incentive to work and produce Click the mouse button or press the Space Bar to display the answer. 65

Reviewing Facts (cont. ) Chapterthe Assessment 6 Cite an example of an economic model used in this chapter. Examples may include graphs of supply and demand curves. Click the mouse button or press the Space Bar to display the answer. 66

Reviewing Facts (cont. ) Chapterthe Assessment 7 Explain the role of shortages and surpluses in competitive markets. shortage: the quantity demanded is greater than the quantity supplied at a given price, and prices will go up; surplus: the quantity supplied is greater than the quantity demanded, and prices will go down Click the mouse button or press the Space Bar to display the answer. 67

Reviewing Facts (cont. ) Chapterthe Assessment 8 Describe three causes of a price change in a market. a change in supply, a change in demand, or a change in both Click the mouse button or press the Space Bar to display the answer. 68

Reviewing Facts (cont. ) Chapterthe Assessment 9 Explain why shortages and surpluses are not temporary when price controls are used. At lower prices there is no incentive for producers to produce more, so shortages continue. At higher prices there is no incentive to buy, so surpluses remain. Click the mouse button or press the Space Bar to display the answer. 69

Reviewing Facts (cont. ) Chapter the Assessment 10 Identify two programs that have historically been used to stabilize farm incomes. loan supports, deficiency payments Click the mouse button or press the Space Bar to display the answer. 70

Reviewing Facts (cont. ) Chapter the Assessment 11 Explain what is meant by the statement that markets “talk. ” The significant movement of prices up or down reflects the judgments of all buyers and sellers in the market. Enough buyers or sellers cause significant price movements that communicate to all buyers and sellers. Click the mouse button or press the Space Bar to display the answer. 71

Thinking Chapter. Critically Assessment 12 Making Generalizations Some people argue that the minimum wage is not a fair price. Use a web like the on page 158 of your textbook to help you identify reasons for this argument. Explain why you agree or disagree. Answers will vary. Click the mouse button or press the Space Bar to display the answer. 72

Thinking (cont. ) Chapter. Critically Assessment 13 Making Predictions Suppose that your state wanted to make health care more affordable for everyone. To do this, state legislators put a series of price controls–price ceilings–in place that cut the cost of medical services in half. What would happen to the demand for medical services at the new, lower price? What would happen to the supply of medical services that doctors would be willing to provide at the new, lower price? Where do you think new doctors would prefer to set up practice? Explain the reasons for your answers. Because demand for medical services tends to be inelastic, the quantity demanded will increase only moderately. Because prices for services would be set below market level, there would be less incentive for doctors to offer services. Quantity supplied would probably decrease. New doctors might want to set up practice in states where there were no price ceilings. Click the mouse button or press the Space Bar to display the answer. 73

Applying Skills Chapter. Economic Assessment 14 Rationing Suppose that a guest speaker visited your class and left 20 ballpoint pens as samples–not knowing that there were 30 students in the class. Devise a nonprice rationing system that would fairly allocate the scarce item to everyone in the class. Rationing systems will vary. Click the mouse button or press the Space Bar to display the answer. 74

Applying Skills (cont. ) Chapter. Economic Assessment 15 Equilibrium Price Many people feel that the minimum wage is too low. If it increased by $1 per hour, what would happen to the number of students who would want to work after school? What would happen to the number of workers that stores in your community would want to hire? Would the combination of these factors cause a shortage or a surplus of workers in your community? Provide an explanation for each of your answers. At a higher minimum wage, there would be more incentive for workers to sell their labor. The number of students wanting to work after school would increase. The higher cost of labor would result in store managers hiring fewer workers, so there might be a surplus of workers. Click the mouse button or press the Space Bar to display the answer. 75

Chapter Assessment 16 Identify what will happen to prices in the following situations: (1) Supply decreases and demand is elastic. (2) Supply increases and demand is inelastic. (3) A surplus exists. (4) Supply remains constant but demand increases. (5) A shortage exists. (1) prices rise slightly; (2) prices fall markedly; (3) prices fall; (4) prices rise; (5) prices rise Click the mouse button or press the Space Bar to display the answer. 76

End of Chapter Assessment Click the mouse button to return to the Contents slide.

Economic Concepts 1

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Cybernomics 3. 1 Outside the Law In the case of body organs, the government has imposed a price control of zero. While people are allowed to donate organs upon their death, anyone caught selling human organs can get up to five years in prison or a $50, 000 fine. Price controls like this, however, often engender black markets. In 1999, for example, someone offered to sell a kidney on e. Bay, an online auction site. The bidding rose to $5. 7 million before e. Bay cancelled the illegal auction.

BW Newsclip 2 What Happened to Cheap Postwar Oil? Making Inferences Why did experts think oil prices would fall with a decisive victory in Iraq? Answers will vary, but may include: Experts believed that a decisive victory in Iraq would end the uncertainty about oil prices, and thus reduce the cost. Continued on next slide. Click the mouse button or press the Space Bar to display the answer. This feature is found on page 156 of your textbook.

NBR 1. 1 Economics and You Video 12: The Price System at Work After viewing The Price System at Work, you should be able to: • Explain how prices are determined by the forces of supply and demand. • Understand how and why producers use rebates to spur demand. • Define and explain the goal of a cartel. • Outline the dynamics of price fluctuation in the agricultural market. Continued on next slide. Click the mouse button or press the Space Bar to display the information.

Profiles in Economics 1. 1 Click a picture to learn more about Gary Becker or Milton Friedman. Be prepared to answer the questions that appear on the next two slides. Gary Becker 1930– Milton Friedman 1912– Continued on next slide. This feature is found on page 141 of your textbook.

Profiles in Economics 1. 2 Making Comparisons How are Becker’s and Friedman’s ideas similar and different? Becker’s and Friedman’s ideas are similar in that they view economic conditions and decisions as fundamental to other aspects of life; they differ in that Becker focuses on the micro, specifically the decision-making of individuals, while Friedman focuses on the macro, specifically the importance of the supply of money or monetary policy. Continued on next slide. Click the mouse button or press the Space Bar to display the answer. This feature is found on page 141 of your textbook.

Profiles in Economics 1. 3 For Further Research Read an article or book by Becker or Friedman. Present a summary of the work to the class. Answers will vary. Click the mouse button or press the Space Bar to display the answer. This feature is found on page 141 of your textbook.

End of Slide Show Click the mouse button to return to the Contents slide.