CHAPTER
6
PRICE
GENERAL INFORMATION
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def THE
EXCHANGE VALUE OF GOODS AND SERVICES AS CALIBRATED IN TERMS OF MONEY
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PRICES ACT AS SIGNALS TO CONSUMER AND PRODUCER
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DETERMINANTS OF PRICE
o
THE INTERACTION OF SUPPLY AND DEMAND
o
GOVERNMENT INVOLVEMENT
§
REGULATION AND SUBSIDIES
o
TYPE MARKET
§
THE FEWER THE SELLERS, THE HIGHER THE PRICE
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FUNCTIONS OF PRICE
o
DETERMINES PRODUCTION
o
AFFECTS THE USE OF RESOURCES
o
RATIONS THAT WHICH IS IN SHORT SUPPLY
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ADVANTAGES OF PRICE AS AN ALLOCATING MECHANISM
o
THEY ARE NEUTRAL MORE EFFICIENT
o
THEY ARE FLEXIBLE
§
PRICES CAN ABSORB SHOCK AND ACCOMMODATE CHANGE
o
THEY PROVIDE FREEDOM OF CHOICE
§
IF PRICES ARE HIGH PEOPLE CAN FLEE TO A SUBSTITUTE
OR DELAY A PURCHASE
o
PRICES HAVE NO ADMINISTRATIVE COSTS
§
THERE IS NO BUREAUCRACY
§
THE MARKET IS SELF-REGULATORY
o
PRICE IS EFFICIENT
§
EVERYONE UNDERSTANDS PRICES
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PROBLEMS OF ALLOCATING IN THE ABSENCE OF PRICE
o
RATIONING def THE ALLOCATION OF SOMETHING IN SHORT SUPPLY
§
THE QUESTION OF FAIRNESS
§
HIGH ADMINISTRATIVE COSTS
§
LOSS OF INCENTIVES
THE DETERMINATION OF PRICE
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ECONOMIC MODEL def A SET OF ASSUMPTIONS THAT CAN BE LISTED IN
A TABLE, CHART OR GRAPH THAT HELPS IN ANALYZING ECONOMIC BEHAVIOR AND HELP
PREDICT ECONOMIC OUTCOMES
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MARKET EQUILIBRIUM IS CHARACTERIZED BY STABLE PRICES
o
THE QUANTITY SUPPLIED = THE QUANTITY DEMANDED
o
ONLY RELATIVE PRICE DIFFERENCES CAN BE FOUND
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SURPLUS def A MARKET CONDITION THAT OCCURS WHEN SUPPLY EXCEEDS
DEMAND
o
THIS USUALLY OCCURS WHEN PRICES ARE TOO HIGH
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SHORTAGE def A MARKET CONDITION THAT RESULTS WHEN DEMAND
EXCEEDS SUPPLY
o
THIS USUALLY OCCURS WHEN PRICES ARE TOO LOW
o
BOTH SHORTAGE AND SURPLUS ARE TEMPORARY CONDITIONS
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EQUILIBRIUM PRICE def THE PRICE THAT CLEARS THE MARKETPLACE
o
SOMETIMES A LOSS LEADER IS USED TO ATTRACT CUSTOMERS
§
Def AN ESPECIALLY LOW PRICE
§
USED IN VARIABLE PRICE MERCHANDISING
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PRICES AS A SYSTEM
o
PRICES ACT AS SIGNALS THAT ALLOCATE RESOURCES
BETWEEN MARKETS
§
EXAMPLE HIGH OIL PRICES
·
AUTOMOBILE MAKERS USE REBATES TO SELL GAS GUZZLERS
o
def A
REFUND OF THE ORIGINAL PAYMENT THAT FUNCTIONS AS A PRICE REDUCTION
·
DEADWEIGHT COSTS def COSTS TO THE CONSUMER WHICH ARE
SIMULTANEOUSLY NOT A BENEFIT TO THE SELLER
o
COST OF WAITING IN LONG GAS LINES
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GOVERNMENT INVOLVEMENT
o
PRICE CEILING def THE MAXIMUM LEGAL
PRICE THAT CAN BE CHARGED
§
EXAMPLE RENT CONTROLS
§
USUALLY CAUSES SHORTAGES
·
WHY THERE IS NO INCENTIVE FOR LANDLORDS TO OFFER
NEW HOUSING UNITS AT WHAT THEY CONSIDER TO BE AN ARTIFICIALLY LOW PRICE
o
PRICE FLOOR def A MINIMUM LEGAL
LIMIT THAT CAN BE CHARGED
§
EXAMPLE MINIMUM WAGE
§
USUALLY CAUSES SURPLUSES
·
WHY MORE AND MORE INDIVIDUALS ARE WILLING TO WORK
FOR A HIGHER SALARY BUT THERE ARE FEWER JOBS AVAILABLE BECAUSE BUSINESS CUT
BACK ON JOBS TO OFFSET INCREASED COSTS OF LABOR
o
SURPLUSES AND SHORTAGES ARE TEMPORARY CONDITIONS
CAUSED BY PRICE CEILINGS AND PRICE FLOORS
o
PROBLEM
§
THEY DISTORT OUTCOMES
·
WHY PRICES DO NOT PROVIDE ACCURATE INFORMATION TO
THE CONSUMER
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FARMERS AND PRICE SUPPORTS
o
SUBSIDY def A GOVERNMENT PRACTICE WHICH
§
ENCOURAGES AN ACTION
§
COMPENSATES FOR A LOSS
o
THE CCC CREDIT COMMODITY CORPORATION
§
CREATED DURING THE NEW DEAL IN AN ATTEMPT TO CURE
THE FARM PROBLEM OF OVERPRODUCTION BY STABILIZING OUTPUT
§
IF THE SELLING
·
PROBLEM GOVERNMENT BEGAN BUILDING UP LARGE
SURPLUSES - HIGH COSTS OF STORAGE
·
PROBLEM THE ASSUMED PERIODS OF SHORTAGE NEVER
MATERIALIZED
o
DEFICIENCY PAYMENTS
§
REPLACED CROP PAYMENTS
§
IF THE SELLING PRICE DID NOT MEET THE TARGET PRICE,
THE GOVERNMENT WOULD FORGIVE THE LOAN
o
GENERAL INFORMATION
§
THESE AGREEMENTS WERE BASED UPON THE PREMISE THAT
THE FARMER WOULD WITHHOLD LAND FROM PRODUCTION
§
RATIONALE FOR THESE PROGRAMS
§
SOCIETY DEEMS INCOME EQUITY MORE THAN ECONOMIC
EFFICIENCY
o
ADVANTAGES OF PRICE SUPPORTS
§
STABILIZES FARM PRICES
§
RAISES NET FARM INCOME
§
ARREST THE DECLINE IN THE NUMBER OF FARM FAMILIES
§
PRESERVE RURAL COMMUNITIES
§
STEM MIGRATION TO CITIES
·
LESS URBAN PROBLEMS
·
LESS MONEY SPENT ON URBAN PROBLEMS
o
DISADVANTAGES OF PRICE SUPPORTS
§
WASTE AND INEFFICIENCY ARE CREATED
§
LACK OF INCENTIVES
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DO MARKETS TALK?
o
YES WHEN PRICES MOVE UP OR DOWN SIGNIFICANTLY
§
THEY MIRROR THE COLLECTIVE JUDGMENTS OF BUYERS AND
SELLERS
ADDENDA