Price Signals in Decision-Making

1. Chapter 6 Prices and Decision Making Splash Screen

2. Economics and You 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. Chapter Introduction 1

3. Chapter Objectives Section 1: Prices as Signals • 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. Chapter Introduction 2

4. Study Guide Main Idea Competitive markets and prices are important to capitalism.  Reading Strategy Graphic Organizer As you read the section, complete a graphic organizer similar to the one on page 137 of your textbook by providing examples from your own experience that show how the price system provides for freedom of choice. Click the mouse button or press the Space Bar to display the information. Section 1 begins on page 137 of your textbook. Section 1-1

5. Introduction • 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. Section 1-4

6. Introduction Introduction (cont.) • 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. Section 1-4

7. Introduction (cont.) • 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. Section 1-4

8. Advantages of Prices • 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. Section 1-5

9. Discussion Question 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. Section 1-Assessment 1

10. Allocations Without Prices • 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. Section 1-8

11. Discussion Question 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. Section 1-Assessment 1

12. Prices as a System • Together, prices comprise a system that helps buyers and sellers allocate resources between markets, linking all markets in the economy. Click the mouse button or press the Space Bar to display the information. Section 1-12

13. Discussion Question Why do you think rebates were not enough to reenergize the big-car market during the 1970s energy crisis? Students should indicate that the rebates did not solve the problems of getting and paying for the additional gasoline the larger cars required. In addition, the additional costs of gasoline could well add up to the rebate amount over the life of the car. Click the mouse button or press the Space Bar to display the answer. Section 1-Assessment 1