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Splash Screen. Chapter Introduction Section 1: Prices as Signals Section 2: The Price System at Work Section 3: Social Goals and Market Efficiency Visual Summary. Chapter Menu.

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  1. Splash Screen

  2. Chapter Introduction Section 1: Prices as Signals Section 2: The Price System at Work Section 3: Social Goals and Market Efficiency Visual Summary Chapter Menu

  3. Have you ever wondered why famous athletes and entertainers make millions of dollars each year? Imagine that you are one of these athletes or entertainers and will be interviewed on a major television program. Knowing that the interviewer will ask you why you make so much money, prepare a list of 5 to 10 reasons that explain why you are worth your salary. Read Chapter 6 to learn about how economic systems allocate goods and services. Chapter Intro 1

  4. Prices are set by buyers and sellers in market economics. Chapter Intro 2

  5. Chapter Intro-End

  6. Section Preview In this section, you will learn that prices act as signals that help us allocate scarce resources. Section 1-Preview

  7. Content Vocabulary • price • rationing • ration coupon • rebate Academic Vocabulary • neutral • criteria Section 1-Key Terms

  8. A B C Do you think eBay buyers and sellers arrive at the perfect price? A. Definitely B. Possibly C.Definitely not Section 1

  9. Prices as Signals • Priceis 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. Section 1

  10. Advantages of Prices Prices help the economy run smoothly by providing a good way to allocate resources. Section 1

  11. 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 & YOUAverage Laptop Prices Section 1

  12. Advantages of Prices (cont.) • Prices are familiar and easy to understand. • Prices have no cost of administration. The Global Economy & YOUAverage Laptop Prices Section 1

  13. A B C D Which of the following is a function of price? A.No administrative costs B.Represent compromise C.Easy to understand D. All of the above Section 1

  14. Allocations Without Prices Rationing has disadvantages that are not present in the price system. Section 1

  15. Allocations Without Prices (cont.) • Without a price system, a rationing system might be used. • Individuals receive a ration coupon to obtain a product. Section 1

  16. Allocations Without Prices (cont.) • Problems with rationing • Difficult to allocate in fair way • Administrative cost of rationing • Negative incentive to produce Section 1

  17. A B C Does rationing have any advantages? A.Definitely B.Possibly C.Definitely not Section 1

  18. Prices as a System Prices connect all markets in an economy. Section 1

  19. 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. Section 1

  20. 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. Section 1

  21. Prices as a System (cont.) • The adjustment process was a natural and necessary shift of resources for a market economy. Profiles in Economics:Irene Rosenfeld Section 1

  22. A B C Have you or anyone in your family ever experienced or taken advantage of this type of market shift? A.Yes B.No C.Not sure Section 1

  23. Section 1-End

  24. Section Preview In this section, you will learn how economic models help us understand prices in competitive markets. Section 2-Preview

  25. Content Vocabulary • economic model • equilibrium price • surplus • shortage Academic Vocabulary • voluntary • fluctuates Section 2-Key Terms

  26. A B C Have you ever overpaid for a product or service? A. Yes, all the time B. Yes, a few times C.Never Section 2

  27. The Price Adjustment Process In a market economy, prices seek their own equilibrium. Section 2

  28. 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. Section 2

  29. The Price Adjustment Process (cont.) • Supply and demand curves intersect to form the equilibrium price. • A surplus is any unsold product on store shelves or in warehouses. • Sellers lower prices to attract more buyers. Market Equilibrium Section 2

  30. The Price Adjustment Process (cont.) • A shortageexists when supply does not meet demand. • Prices and quantities will go up to meet demand. Surpluses and Shortages Section 2

  31. The Price Adjustment Process (cont.) • When the equilibrium price is found, there is no shortage or surplus during the market period. • Factors may come along to disturb the equilibrium price, then shortages and surpluses will appear again to find a new equilibrium level. Surpluses and Shortages Section 2

  32. A B C At the equilibrium price, which statement is true? A.A shortage exists. B.No factors can disturb the price. C.No surplus or shortage exists. Section 2

  33. Explaining and Predicting Prices Changes in supply and demand can result in changes in prices. Section 2

  34. Explaining and Predicting Prices (cont.) • A change in price is normally caused by • A change in supply – • Agriculture prices • A change in demand – • Income, tastes, prices, substitutes, expectations, # of consumers; Changes in Prices Section 2

  35. A change in supply and demand – • Oil (increase in demand, decrease in supply – hurricanes)

  36. Explaining and Predicting Prices (cont.) • Predictions can be made if we know the elasticity of each curve and the underlying factors that cause the 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 the buyers and sellers. Section 2

  37. A B C D What is an advantage of competitive markets? A.Suppliers and buyers are forced to compromise. B.Rationing coupons are used. C.Resources are allocated efficiently. D. Competition in the market exists. Section 2

  38. Section 2-End

  39. Section Preview In this section, you will learn that governments sometimes use policies that interfere with the market in order to achieve social goals. Section 3-Preview

  40. Content Vocabulary • price ceiling • minimum wage • price floor • target price • nonrecourse loan • deficiency payment Academic Vocabulary • arbitrarily • stabilize Section 3-Key Terms

  41. A B C Do you think the increase in Federal Minimum Wage hurts or helps the economy? A. Helps B. Hurts C.Not sure Section 3

  42. Distorting Market Outcomes Price ceilings and price floors prevent prices from allocating goods and resources. Section 3

  43. Distorting Market Outcomes (cont.) • Sometimes the price system cannot accurately inform buyers and sellers in the market. Section 3

  44. Distorting Market Outcomes (cont.) • Price ceilingadvantages • Some individuals are happy. • Individuals who could not afford the market price not may be eligible. Price Ceilings Section 3

  45. Distorting Market Outcomes (cont.) • Price ceiling disadvantages • Demand becomes too high. • Suppliers face lower profits. • Suppliers limit service or leave market altogether. Price Ceilings Section 3

  46. Distorting Market Outcomes (cont.) • Price floor • Minimum wageis an example. Price Floor Section 3

  47. A B Which statement do you think is correct? A.Price ceilings have a negative effect on the allocation of resources. B.Price ceilings have positive factors that outweigh the negative affect on resources allocated. Section 3

  48. Agricultural Price Supports Government programs to help stabilize prices for farmers have both positive and negative effects. Section 3

  49. Agricultural Price Supports (cont.) • During the Great Depression of the 1930s, farm prices fell much further than other prices in the economy. • Federal government established the Commodity Credit Corporation (CCC) to help farmers. Section 3

  50. Agricultural Price Supports (cont.) • Under the CCC support programs • Atarget pricewas established to help stabilize farm prices. • Loan supports like the nonrecourse loan were available. • Farmers received a deficiency payment. Deficiency Payments Section 3

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