Chapter 6 Prices and Decision Making Section 1 p. Terms: • Price • 137 the monetary value of a product as established by supply and demand • Communicate information to buyers and sellers • Provide incentive to buyers and sellers • WE What kind of economy uses supply and demand to set price? • Free-market (free-enterprise, market-economy)
Rationing • 139 a system where an agency, most likely the government, decides how much each person is entitled to • Fair share • Ration coupon • A ticket prescribing how much a person’s ration is and when they can have it.
rebate • 140 a partial refund of the original price of a product. • Usually from the maker • Consumer must mail in a certificate with a receipt
Section 2 Terms: • Economic model • 143 a set of assumptions that can be • listed in a table • Illustrated with a graph • Stated algebraically • Helps to • Analyze behavior • Analyze outcome
Market equilibrium • 143 when prices are • relatively stable • Goods/services supplied equally to demand
Surplus • 144 a situation in which the quantity supplied is greater than the quantity demanded
shortage • 144 situation in which quantity demanded is greater than quantity supplied
Equilibrium price • 145 the price where there is neither a surplus or a shortage at the end of a trading period. • “clears the market”
Section 3, Terms: • Price ceiling • 151 a maximum legal price that can be charged for a product • Done for a social goal to help lower and fixed income people • Rent control
Minimum wage • 152 The lowest legal wage that can be paid to most workers • Price floor • 152 The lowest legal price that can be paid for a good or service • Reminder: Price floors are meant to help lower and fixed income people.
Target price • 153 A price floor for farm products • Government will help farmers two ways • Target prices • Loan supports
Nonrecourse loan • 153 a loan that carries neither a penalty nor further obligation to repay if not paid back • A farmer could get at least the target price for his/her crops • Given to farmers by the CCC (Commodity Credit Corporation) of the US Government in the 1930s. • Involved the farmer • Borrowing money at the target price • Pledging his/her crops as security (collateral) in return • Farmer sold crops and kept any profits, paying back loan • Or farmer kept money from loan, paid government with crops
Deficiency payment • 153 a check sent to producers that makes up for the difference in the actual market price and the target price • If the target price is higher than the market price
Assessments: Checking for Understanding • 1 • Consumers weigh the price against their need • Consumers will purchase • less at a high price • More at a low price
Assessments • 3 • High prices • Producers produce more • Consumers buy less • Low prices: • Producers produce less • Consumers buy more
Assessments • 4 • Neutrality • Flexibility • Lack of administrative costs • familiarity
Assessments • 5 • Unfair system of allocation • High cost of administering the system • Employees/producers will want to work less
Assessments: Checking for Understanding • 1 • Changes that affect demand and, therefore, price. • Income • Taste
Assessments • 3 • Prices are adjusted through • Competition between buyers and sellers
Assessments • 4 • They show how markets work by helping • Analyze behavior • Predicting outcomes
Assessments • 5 • The more elastic, the smaller the price change • The less elastic, the larger the price change
Assessments: Checking for Understanding • 1 • To achieve equity and security
Assessments • 3 • Shortages result if • Prices are set below equilibrium • Surpluses result if • Prices are set above equilibrium
Assessments • 4 • 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.
Assessments • 5 • The significant movement of prices, signals the collective decisions • Whether up or down
Image, p. 138 • Questions • Tokyo, Japan • Answer should reflect knowledge of price allocation
Image, p. 143 • Question • $15 • + so how is the equilibrium point identified on the • Schedule? • Surplus/shortage = 0 • Curve? • Supply and demand curves intersect
Images, p. 145 • Question • No one is sure what the equilibrium price for a new product will be • They estimate on the first day, • Then adjust the price
Images, p. 146 • Question • It shows a smaller range of price fluctuations • The curve tends to be more horizontal • + in the left example, why might demand be inelastic? • There are no substitutes • The purchase cannot be delayed • + in the right example, why might demand be elastic? • There are substitutes • The purchase can be delayed
Other price motivations…..COPY THE QUESTIONS. • Why is his product so expensive? (5) • How does he keep his costs down? • What does he do when nobody buys his lemonade product? • Who has the role of the government in this cartoon?
Other price motivations….. • Why is his product so expensive? (5) • Pay stockholders their dividends • Pay executives their exorbitant salaries and benefits • Pay the workers their wages and benefits • Overhead • Production costs • How does he keep his costs down? • Using the cheapest methods • What does he do when nobody buys his lemonade product? • Demands a subsidy from the government • Who has the role of the government in this cartoon? • His mother
Images, p. 147 • Question • Bad news • War • Disaster • Possible recession • Should the price of gold be high, presently? Explain. • Current price of gold, 11/5: • $1395/oz. • US and global recession
Image, p. 153 • Question • Problems regarding • Fairness • High administrative costs • Diminished incentives to work and produce • Large surpluses
Image, p. 154 • Question • Loan program: • Farmer received $40,000 as a loan at the beginning of the season • Deficiency payment program: • Farmer received $40,000 from selling crops and a payment to make up the difference.