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Chapter 6 Prices and Decision making

Chapter 6 Prices and Decision making. Section 1 – Prices as Signals. Advantages of Prices Neutral Flexible Freedom of Choice No Administrative Cost Efficient. Advantage of Prices - NEUTRAL. Neither buyers nor sellers are favored; both influence price

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Chapter 6 Prices and Decision making

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  1. Chapter 6Prices and Decision making

  2. Section 1 – Prices as Signals • Advantages of Prices • Neutral • Flexible • Freedom of Choice • No Administrative Cost • Efficient

  3. Advantage of Prices - NEUTRAL • Neither buyers nor sellers are favored; both influence price • Competition makes the adjustment of prices more efficient • Less competitive markets make prices less efficient • EXAMPLES: • Pizza Shops – lots of competition keeps prices in check • Brain Surgeon – not many, so value of service is high, impacting prices

  4. Advantage of Prices - FLEXIBLE • Prices change all the time in response to buyers and sellers • Unforeseen events affect price - weather, natural disasters, wars • Buyers and sellers adjust their consumption and production accordingly • If prices are too high or too low, they can change daily in response to buyers and sellers • EXAMPLE: Price of Bottled Water in New Orleans after Hurricane Katrina; price of bottled water today

  5. Advantage of Prices - CHOICE • Variety of products are offered in Market Systems, allowing for wide range of prices • Range of prices allow consumers more choice • People can elect not to buy when prices are high, or find a substitute. • Command Economies (government controlled) offer far less choice (economic freedom) because the government tells consumers what resources, goods and services will be allocated (given) to the them. This often results in shortages and scarcity. • EXAMPLE: KIA v. BMW v. Don’t buy a car

  6. Advantage of Prices – NO COST • There is no government control of Market System prices, so no administrative oversight is necessary. • Sellers and buyers influence prices, not the government. • Command Economies may have government employees visiting businesses to set the price of goods, unlike a market system when supply and demand influence price. • EXAMPLE: Kohls can change the price of its jewelry any time it chooses, and often does, in response to consumer demand and its supply.

  7. Advantage of Prices - EFFICIENT • Prices send a message to consumers and producers about goods and services – allowing them to make decisions about those items • This is an efficient system through which information is conveyed – what does PRICE tell you about a product? • What does an item sold at the dollar store tell you about the product? • What does a $10,000 price tag on a ring tell you about the item? • If you have the money, you can buy it; no waiting for allocation by government

  8. World War II Rationing • Ration stamps became a kind of currency with each family being issued a "War Ration Book." The War made some resources scarce. • Each stamp authorized a purchase of rationed goods in the quantity and time designated, and the book guaranteed each family its fair share of goods made scarce, thanks to the war. • "Red Stamp" rationing covered all meats, butter, fat, and oils, and with some exceptions, cheese. • "Blue Stamp" rationing covered canned, bottled, and frozen fruits and vegetables, plus juices and dry beans; and such processed foods as soups, baby food and ketchup • http://www.u-s-history.com/pages/h1674.html

  9. Allocations without Prices • Allocation – assigning goods and services to people based on a system other than price • Good looks… • Intelligence… • Gender… • Religion… • Political connections… • Eye Color… • What is the problem with these systems?

  10. Allocations without Prices – Problem of Fairness • How do you ration between people? • Gas Rationing Plan – Oil Crisis of the 1970s • Who receives gas? All drivers? Adults? • Should family size matter? • Should car type matter? Fuel efficiency? • Does your job matter? Doctor versus Teacher versus Waitress • Who “deserves” the gasoline?

  11. Allocations without Prices – High Administrative Costs • Employees (government workers) are needed to… • print coupons • pass out coupons • manage complaints • This costs time and money • These expenses do not exist in Markets

  12. Allocations without Prices – Diminished Incentives • When you are given what you need or want, why bother working for anything??? • When the government gives everyone all an equal share, where is the incentive to perform your job well? • People tend to not care for the items they are given – they do not appreciate them because they have not WORKED for them!

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