How does price effect the use of natural
resources?
WHY?
TN-2.1, LEVEL 1: Students able to read
charts and graphs
TN-Level 2-3 Student will be able to
relate to major systems
Prices as Signals
•  Price is a signal, giving information to
buyers and sellers.
–  High prices— buyers buy less and
producers produce more.
–  Low prices—buyers buy more and
producers produce less.
Advantages of Prices (cont.)
•  Prices help consumers and producers
make decisions on WHAT, HOW, and FOR
WHOM:
–  In a competitive market, prices are
neutral.
–  Prices in a market economy are flexible.
The Global Economy & YOU
Average Laptop Prices
Advantages of Prices (cont.)
–  Prices are familiar and easy to understand.
–  Prices have no cost of administration.
The Global Economy & YOU
Average Laptop Prices
Allocations Without Prices (cont.)
•  Without a price system, a rationing
system might be used.
•  Individuals receive a ration coupon to
obtain a product.
Allocations Without Prices (cont.)
•  Problems with rationing
–  Difficult to allocate in fair way
–  Administrative cost of rationing
–  Negative incentive to produce
Prices as a System (cont.)
•  Prices help individuals make decisions and
serve as signals in allocating resources
between markets.
–  Higher oil prices have affected producer
and consumer decisions.
–  Oil is inelastic; higher costs leave
individuals with less to spend.
Prices as a System (cont.)
–  SUV sales dropped; manufacturers offered
a rebate.
–  Manufacturers reduced production, closed
plants, laid off workers.
–  Employees find jobs in new industries.
Prices as a System (cont.)
•  The adjustment process was a natural and
necessary shift of resources for a market
economy.
Profiles in Economics:
Margaret (Meg) Whitman
•  Section 2:
•  What has happened in the market when there
isn’t a shortage or a surplus?
The Price Adjustment Process (cont.)
•  Transactions in a market economy are
voluntary, so compromises between
buyers and sellers must benefit both.
•  An economic model is used to analyze
behavior and predict outcomes.
The Price Adjustment Process (cont.)
•  Supply and demand curves intersect to
form he equilibrium price.
–  A surplus is any unsold product on store
shelves or in warehouses.
–  Sellers lower prices to attract more
buyers.
Market Equilibrium
The Price Adjustment Process (cont.)
–  A shortage exists when supply does not
meet demand.
–  Prices and quantities will go up to meet
demand.
Surpluses and Shortages
The Price Adjustment Process (cont.)
•  When he equilibrium price is found, there
is no shortage or surplus during he market
period.
•  Factors may come along to disturb he
equilibrium price, then shortages and
surpluses will appear again to find a new
equilibrium level.
Surpluses and Shortages
Explaining and Predicting Prices (cont.)
•  A change in price is normally caused by
–  A change in supply
–  A change in demand
–  A change in supply and demand
Changes in Prices
Explaining and Predicting Prices (cont.)
•  Predictions can be made if we know he
elasticity of each curve and he underlying
factors that cause he supply and demand
curves to change.
•  A competitive market is one that runs
itself, finding its own equilibrium.
•  Questions of WHAT, HOW, and FOR
WHOM are decided by he buyers and
sellers.
Distorting Market Outcomes (cont.)
•  Price ceiling advantages
–  Some individuals are happy.
–  Individuals who could not afford he
market price not may be eligible.
Price Ceilings
Distorting Market Outcomes (cont.)
•  Price ceiling disadvantages
–  Demand becomes too high.
–  Suppliers face lower profits.
–  Suppliers limit service or leave market
altogether.
Price Ceilings
Distorting Market Outcomes (cont.)
•  Price floor
–  Minimum wage is an example.
Price Floors
Agricultural Price Supports (cont.)
•  During he Great Depression of he 1930s,
farm prices fell much further than other
prices in he economy.
•  Federal government established he
Commodity Credit Corporation (CCC) to
help farmers.
Agricultural Price Supports (cont.)
•  Under he CCC support programs
–  A target price was established to help
stabilize farm prices.
–  Loan supports like he
nonrecourse loan were available.
–  Farmers received a
deficiency payment.
Deficiency Payments
Agricultural Price Supports (cont.)
•  Agricultural output increased greatly over
time, as did he number of farmers.
•  Government wanted farmers to stop
farming—he Conservation Reserve
Program of 1985 pays farmers not to farm.
Agricultural Price Supports (cont.)
•  Efforts to make farming responsive to he
market forces of supply and demand
continue today with he Farm Security and
Rural Investment Act of 2002.
Which statement is true?
C. Both A and B
0%
C
0%
A
B. Acreage is set aside in
land banks and farmers
are paid not to farm.
A.  A
B.  B
0%
C.  C
B
A. American agriculture is
more dependent than
ever on subsidies and
price supports.
When Markets Talk
Markets send signals when
prices change in response to
events.
When Markets Talk (cont.)
•  Markets bring buyers and sellers together.
•  Markets are said to talk when prices in
them move up or down significantly in
reaction to events that take place
elsewhere in he economy.
•  Stock markets, for example, react quickly
to interest rate changes made by he
Federal Reserve.
Allocation of Resources Prices are signals that
help buyers and sellers make economic decisions.
Without prices, societies must find other ways to
allocate resources.
Market Equilibrium
When buyers and
sellers can freely
make production and
purchase decisions,
he price of a product
will move toward
market equilibrium. At
this point, he quantity
supplied is exactly
equal to he quantity
demanded.
Social Goals and Prices The social goals of equity
and security sometimes can be achieved only by
giving up parts of other goals. Price ceilings or price
floors can help achieve these goals, but they may
result in fewer goods and services offered overall.
Margaret (Meg)
Whitman (1956– )
•  ranked by Fortune magazine
as he Most Powerful
Woman in Business in 2005
•  turned eBay into one of he
fastest-growing companies
in U.S. history
Economic Concepts
Transparencies
Transparency 7
Markets and Prices
Transparency 8
Supply and Demand
Select a transparency to view.
price
monetary value of a product as
established by supply and demand
rationing
system of allocating goods and
services without prices
ration coupon
permit allowing holder to receive a
given amount of a rationed product
rebate
partial refund of a product s
original price
neutral
favoring neither side in a dispute
criteria
a standard or rule on which judgment
can be based
economic model
a simplified version of a complex
behavior expressed in he form of an
equation, graph, or illustration
equilibrium price
price where quantity supplied equals
quantity demanded
surplus
situation where quantity supplied is
greater than quantity demanded at a
given price
shortage
situation where quantity supplied is
less than quantity demanded at a
given price
voluntary
done or brought about by free choice
fluctuates
changes continually and irregularly
price ceiling
highest legal price that can be
charged for a product
minimum wage
lowest wage that can be paid to most
workers
price floor
lowest legal price that can be paid for
a product
target price
price floor for agricultural products set
by he government to stabilize farm
income
nonrecourse loan
agricultural loan that carries no
penalty or further obligation if it is
not paid
deficiency payment
cash payment making up he
difference between he market price
and he target price
arbitrarily
randomly or by chance
stabilize
to make steady or unwavering
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