Download Prices and Decision Making

Prices and Decision
Making
Chapter 6
Goals & Objectives
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6.
7.
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Prices as Signals in the marketplace.
Prices & allocation of resources.
Scarcity without prices: Communism
Prices in competitive markets.
Price changes and influencing factors.
Elasticity and price changes.
Fixed prices and market shortages.
Loan supports, deficiency payments, target
prices: Gov’t involvement.
Prices as Signals in the Market
Monetary value of a product established
by supply and demand in the marketplace.
1. Subsidies effects:
2. Entitlement effects:
3. Regulation effects:
4. Monopoly effects:
Provide examples for each.
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Dairy Subsidies
Advantages of Prices
1. Serve as a link between Consumers
and Producers.
 Prices determine: What, How, and For
Whom to Produce
Gov’t Regulation & Gas Prices
Advantages of Prices
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2. Prices are neutral (Competitive
Market).
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They favor neither the producer or consumer
Willing seller & a willing buyer
Explain how government subsidies affect
prices in the short and long run.
Subsidies & Iron Triangles
Advantages of Prices
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3. Prices are flexible (Market Economy)
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Explain how government regulations affect
flexible prices: Fads, Fashions, trends Natural
Disasters, profit motives
Price Gouging Laws & Shortages
Advantages of Prices
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4. Prices have no administrative
costs or tax base needs from the
marketplace
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Fewer Gov’t employees to determine: What,
How and For Whom To Produce
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Example: Social Security, Welfare, Food Stamps,
Regulation of Indian Affairs, etc…
Taxes are Administrative Costs
Advantages of Prices
5. Prices are familiar and easily
understood by most
1. Minimum wage requirements and
price offsets. Explain: Price-Wage Spiral.
2. Obamacare and market-prices?
3. Oil & gasoline prices and
government regulation?
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Health Insurance Regulation
Allocations without Prices
1.
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Without prices; Who decides who gets
what, how and for whom to produce?
Government allocates, rations,
redistributes wealth by answering the
For Whom To Produce question.
1. rationing coupon: Food Stamps
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Government deciding “everyones fair share”
Wealth Redistribution by Rationing
The Problem of Fairness
 1. High Administrative Costs:
Bureaucracy and Taxes
 2. Diminished Incentive: Why be
productive if your needs are provided for
by taxpayers. (Unemployment
Compensation Insurance, Welfare, Food
Stamps, Housing, Obamacare)
Unemployment &
Diminished Incentive
Prices as a System

Prices serve as signals.
• 1. Higher oil prices in the 1970’s led to:
A. smaller automobiles more fuel efficient
 B. Carpooling to work
 C. New technology in the auto industry
• 2. Lower oil prices in the 1990’s led to a
booming consumer economy. Why?
• 3. How would cheap gasoline affect green
energy prices and demand for green energy
products?
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Rebates
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What is a rebate?
• A partial refund of the original price.
• Why offer? Competitive advantage over
smaller retailer/whole-sellers.
• Who Benefits? Consumer and Retailer.
Milton Friedman
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Capitalism and Freedom
1. Agricultural subsidies?
2. Price controls?
3. Minimum Wage Requirements?
4. Federal Reserve System?
The Price System at Work
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Market Equilibrium: Market Price
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Supply and Demand curve cross.
1. Surplus: quantity supplied is greater
than the quantity demanded JIC Theory
2. Shortage: quantity supplied is less
than the quantity demanded. JIT Theory
Surplus & Shortage
Explaining Market Prices
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Causes in Supply Change: Expectations
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Causes in Demand Change: Fads, Trends
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A Competitive Price Theory: the
market runs itself without gov’t
interference.
Distorting Market Outcomes
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Social Goals: Gov’t setting prices at
“socially desirable” levels.
Marketplace Effects of Social Goals:
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Medicaid: 50% doctors do not accept; Trillion dollars in Tax Revenue
Medicare: Govt decides who gets care; Trillion dollars in Tax Revenue
Obamacare: Govt decides who gets care; Shortage of suppliers
Food Stamps: Inflation of food prices.
HUD or Fannie Mae or Freddie Mac: Housing bubble & burst;
deflation of housing prices; increased foreclosures.
Medicaid & Costs
Medicare Costs
Food Stamps & Costs
Social Goals vs. Market Efficiency
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Government goals of: Full Employment,
Price Stability, Economic Growth
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Are in competition with: Profit Motives,
Economic Freedom, Economic Efficiency
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Price ceilings and Price floors:
Price Ceilings & Shortages
Price Ceilings
Rent
Control: Some people can not afford
rent = Gov’t Rent controls = Lessened
quality of available rental units = Gov’t
Regulations on rent quality = Lessened
number of available units for rent =
Government built rental units!
Gov’t caused Shortages
Price Floors
Some
people make too little money =
Government minimum wage requirement =
lessened productivity = expensive workers
= more unemployed persons = need for
Welfare, Food Stamps, Unemployment
Compensation
Gov’t caused: Unemployment or Labor
Shortages
Agricultural Price Supports
Commodity Credit Corporation 1930;
Today’s Department of Agriculture:
 Loan Supports: Nonrecourse loan:
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 Effects:
Surplus of Food owned by Gov’t
Deficiency Payments: Gov’t subsidy for
prices under target prices or profits
 Target Prices: Govt established
wages/profits for farmers.
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Subsidys, Surpluses, Shortages
Loan Supports
Farmers
receive government loans to grow
certain crops for a guaranteed price to the
government in return.
Peanuts!!!
Cotton!!!
Deficiency Payments
Result of CCC: Huge surpluses of peanuts and
cotton
 Government sells product in market below
market price. Long term affects of low prices
equals fewer suppliers. Example: Dairy or Milk
producers
 Government allows farmer to sell product and
receive an additional payment for lost profits.
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Reforming Price Supports
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FAIR– 1996-2002: Federal Agricultural
Improvement and Reform:
Winners: Big Corporate Agricultural Industry
2. Losers: Private farms and family farms.
1.
Gov’t caused surpluses in short run.
Gov’t caused shortages in the long run.
Gov’t created monopolies.