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Contents

CHAPTER INTRODUCTION

SECTION 1 Prices as Signals

SECTION 2 The Price System at Work

SECTION 3 Social Goals vs. MarketEfficiency

CHAPTER SUMMARY

CHAPTER ASSESSMENT

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Chapter Introduction 1

Economics and YouWhat factors do you consider when youneed to make a decision to buysomething? Price may be one of the mostimportant factors of all. In this chapter,you will learn how price serves as a signalto both buyers and sellers.

Click the Speaker button to listento Economics and You.

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Chapter Objectives

• Explain how prices act as signals. • Describe the advantages of using prices

as a way to allocate economic products. • Understand the difficulty of allocating

scarce goods and services without usingprices.

Section 1: Prices as Signals

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Chapter Objectives

• Understand how prices are determinedin competitive markets.

• Explain how economic models can beused to predict and explain price changes.

• Apply the concepts of elasticity tochanges in prices.

Section 2: The Price System at Work

Click the mouse button or press the Space Barto display the information.

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Chapter ObjectivesSection 3: Social Goals vs. Market

Efficiency


• Describe the consequence of having a fixedprice in a market.

• Explain how loan supports and deficiencypayments work.

• Understand what is meant when “marketstalk.”

End of Chapter Introduction

Click the mouse button to return to the Contents slide.

9

Section 1-1

Study GuideMain Idea

Competitive markets and prices are important tocapitalism.

Reading StrategyGraphic Organizer As you read the section,complete a graphic organizer similar to the oneon page 137 of your textbook by providingexamples from your own experience that showhow the price system provides for freedom ofchoice.

Click the mouse button or press the Space Bar to display theinformation. Section 1 begins on page 137 of your textbook. 10

Key Terms

– rationing – price

Section 1-2

Study Guide (cont.)

Click the mouse button or press the Space Bar to display theinformation. Section 1 begins on page 137 of your textbook.

ObjectivesAfter studying this section, you will be able to: – Explain how prices act as signals. – Describe the advantages of using prices as a

way to allocate economic products. – Understand the difficulty of allocating scarce

goods and services without using prices.

– ration coupon – rebate

11

Section 1-3

Applying Economic ConceptsRationing Have you and your friends ever triedto share something–a candy bar, cake, orpizza–when there really wasn’t enough to goaround? What are different ways to makeallocations?

Study Guide (cont.)

Click the Speaker button to listen tothe Cover Story.

Section 1 begins on page 137 of your textbook.12

Section 1-4


Introduction• Life is full of signals that help us make

decisions. • A price–the monetary value of a product

as established by supply and demand–isa signal that helps us make oureconomic decisions.

• High prices are signals for producers toproduce more and for buyers to buyless.

• Low prices are signals for producers toproduce less and for buyers to buymore.

13

Section 1-5


• Prices serve as a link between producersand consumers.

• In doing so, they help decide the threebasic WHAT, HOW, and FOR WHOMquestions all societies face.

• Without prices, the economy would notrun as smoothly, and decisions aboutallocating goods and services wouldhave to be made some other way.

Advantages of Prices

14

Section 1-6


• Prices perform the allocation function verywell for the following reasons. – First, prices in a competitive market economy

are neutral because they favor neither theproducer nor the consumer. This is becauseprices are the result of competition betweenbuyers and sellers.

– Second, prices in a market economy areflexible. Unforeseen events such as naturaldisasters and war affect the prices of manyitems.

– Third, prices have no cost of administration.Competitive markets tend to find their ownprices without outside help or interference.

Advantages of Prices (cont.)

15

Section 1-7

Advantages of Prices (cont.)

– Finally, prices are something that we haveknown about all our lives, from the time wewere old enough to ask our parents to buy ussomething to the age where we were oldenough to buy it ourselves.

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Section 1-8


Allocations Without Prices• Without prices, another system must be

used to decide who gets what. • One method is rationing–a system under

which an agency such as governmentdecides everyone’s “fair” share.

• Under such a system, people receive aration coupon, a ticket or a receipt thatentitles the holder to obtain a certainamount of a product.

• Rationing is used in many societies today,and it has been widely used duringwartime, but it can lead to problems.

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Section 1-9


• The first problem with rationing is thatalmost everyone feels his or her share istoo small.

• During the oil crisis of the early 1970s, forexample, the government made plans for,but never implemented, a gas rationingprogram.

• One of the major problems with theprogram was determining how to allocatethe gas rationing coupons.

The Problem of Fairness

18

Section 1-10


• A second problem of rationing is the cost. • Someone has to pay for printing the

coupons and the salaries of the people whodistribute them.

• In addition, no matter how much care istaken, some coupons will be stolen, sold, orcounterfeited and used to acquire a productintended for someone else.

High Administrative Cost

19

Section 1-11


• A third problem is that rationing has anegative impact on people’s incentive towork and produce.

• Suppose that authorities went ahead with arationing system and that you were given acertain number of coupons. How would thisaffect your incentive to work?

• Nonprice allocation mechanisms, such asrationing, raise issues that do not occurunder a price allocation system.

Diminishing Incentive

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Section 1-12


• Because of the many difficulties withnonprice allocation systems, economistsoverwhelmingly favor the price system.

• In fact, prices do more than help individualsin specific markets make decisions: theyalso serve as signals that help allocateresources between markets.

• Consider the way in which higher oil pricesaffected producer and consumer decisionswhen the price of oil went from $5 to over$40 a barrel in the 1970s.

Prices as a System

21

Section 1-13


Prices as a System (cont.)

• The market for full-size automobiles wasone of the first to feel the effects.

• To move their inventories, somemanufacturers began to offer a rebate–a partial refund of the original price of theproduct.

• As time went on, however, the surplus ofunsold cars remained. Automakers beganreducing their production of large cars.

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Section 1-14

• The result of higher prices in theinternational oil market, then, was a shiftof productive resources out of the largecar market into other markets.

Prices as a System (cont.)

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Section 1-Assessment 1

Section Assessment

Main Idea Using your notes from thegraphic organizer activity on page 137of your textbook, describe how priceaffects decisions that consumersmake.

Consumers will purchase less at ahigh price and more at a low price.Consumers also weigh the priceagainst their need.

Click the mouse button or press the Space Barto display the answer. 24


Section Assessment (cont.)

Describe how producers andconsumers react to prices.

When prices are high, producersproduce more and consumers buyless. When prices are low, producersproduce less and consumers demandmore.

Click the mouse button or press the Space Barto display the answer.

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List the advantages of using prices todistribute economic products.

Advantages include neutrality,flexibility, lack of administrative costs,and familiarity.




Explain the difficulties of allocatinggoods and services without a pricesystem.

Difficulties include an unfair system ofallocation, the high cost ofadministering the system, and thenegative impact of the system onincentive to work and produce.


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Rationing From your own experience,describe a situation that required someform of rationing. What criteria wereused to allocate the good or service,and what were some of the problemswith each of the criteria?

Answers will vary.




Understanding Cause and EffectList five items you would like to buy.How does the price of each item affectyour decision to allocate your scarceresources–your money and your time?Explain.

Answers will vary.


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Debate the following statement:In every respect, price is the bestsystem of allocating goods andservices.

Section Close

End of Section 1


31

Section 2-1



Changes in demand and supply cause prices tochange.

Reading StrategyGraphic Organizer As you read the section,complete a graphic organizer similar to the oneon page 142 of your textbook, showing how asurplus and shortage affect prices, demand, andsupply.

32

Section 2-2


Key Terms

– market equilibrium – surplus

– economic model

Study Guide (cont.)

– shortage – equilibrium price

ObjectivesAfter studying this section, you will be able to: – Understand how prices are determined in

competitive markets. – Explain how economic models can be used

to predict and explain price changes. – Apply the concepts of elasticity to changes in

prices.

33

Section 2-3

Click the Speaker button to listento the Cover Story.

Section 2 begins on page 142 of your textbook.

Applying Economic ConceptsEquilibrium Price When something is atequilibrium, it tends to remain at rest. Whatcauses prices to reach, and then stay at,equilibrium?

Study Guide (cont.)

34

Section 2-4


Introduction• One of the most appealing features of a

competitive market economy is thateveryone who participates has a hand indetermining prices.

• This is why economists consider prices tobe neutral and impartial.

• The process of establishing prices isremarkable because buyers and sellershave exactly the opposite hopes anddesires. Buyers want to find good buys atlow prices. Sellers hope for high prices andlarge profits.

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Section 2-5

• Because transactions in a marketeconomy are voluntary, the compromisethat eventually takes place must be to thebenefit of both parties, or the compromisewould not occur in the first place.

The Price Adjustment Process

36

Section 2-6

An Economic Model• To show how the adjustment process takes

place, we use a supply and demandillustration shown in Figure 6.1a–one of themore popular “tools” used by economists.

Figure 6.1a

37

Section 2-7


An Economic Model (cont.)

• The figure illustrates an economicmodel–a set of assumptions that can belisted in a table, illustrated with a graph, oreven stated algebraically–to help analyzebehavior and predict outcomes.

• A complete model of the market will allowus to analyze how the interaction of buyersand sellers results in a price that isagreeable to all.

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Section 2-8


Market Equilibrium• In a competitive market, the adjustment

process moves toward marketequilibrium–a situation in which pricesare relatively stable, and the quantity ofgoods or services supplied is equal to thequantity demanded.

• In Figure 6.1b,equilibrium isreached when theprice is $15 and thequantity supplied issix units.

Figure 6.1b

39

Section 2-9


Market Equilibrium (cont.)

• How does the market find this equilibriumon its own?

• To answer these questions, we have toexamine the reactions of buyers and sellersto market prices.

• In addition, we assume that neither knowsthe final price, so we’ll have to find it usingtrial and error.

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Section 2-10


Surplus• A surplus is a situation in which the

quantity supplied is greater than thequantity demanded at a given price.

• Surplus shows up as unsold products onsuppliers’ shelves, and it begins to take upspace in the suppliers’ warehouses.

• Sellers now know that their price is toohigh, and they know that they have to lowertheir price if they want to attract morebuyers and dispose of the surplus.

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Section 2-11

• Therefore,the pricetends to godown as aresult of thesurplus, asshown inFigure 6.2a.

Surplus (cont.)

Figure 6.2a

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Section 2-12


• A shortage is a situation in which thequantity demanded is greater than thequantity supplied at a given price.

• When a shortage happens, producers haveno more products to sell, and they end theday wishing that they had charged higherprices for their products.

Shortage

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Section 2-13

Shortage (cont.)

• As a result,both the priceand thequantitysupplied willgo up in thenext tradingperiod, asshown inFigure 6.2b.

Figure 6.2b

44

Section 2-14


Equilibrium Price• The equilibrium price is the price that

“clears the market” by leaving neither asurplus nor a shortage at the end of thetrading period.

• While our economic model of the marketcannot show exactly how long it will take toreach equilibrium, equilibrium will bereached because of the pressure thattemporary surpluses and shortages put onprices.

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Section 2-15

Equilibrium Price (cont.)

• Whenever theprice is set toohigh, thesurplus willtend to force itdown, asshown inFigure 6.2c.

Figure 6.2c

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Figure 6.2d

Section 2-16

• Whenever theprice is set toolow, theshortage willtend to force itup. As a result,the markettends to seekits ownequilibrium, asshown inFigure 6.2d.


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Section 2-17


• When the equilibrium price is reached, itwill tend to remain there because thequantity supplied is exactly equal to thequantity demanded.

• Something could come along to disturb theequilibrium, but then new shortages or newsurpluses, or both, would appear to pushthe price to its new equilibrium level.


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Section 2-18


Explaining and Predicting Prices• Economists use their market models to

explain how the world around us worksand to predict how certain events suchas changes in prices might occur.

• A change in price is normally the result ofa change in supply, a change in demand,or changes in both.

• Elasticity of demand is also importantwhen predicting prices.

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Section 2-19


• Consider the case of agriculture, whichoften experiences wide swings in pricesfrom one year to the next.

• A farmer may keep up with all the latestdevelopments and have the best adviceexperts can offer, but the farmer never canbe sure what price to expect for the crop.

• Weather is one of the main reasons for thevariation in agricultural prices.

Changes in Supply

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Section 2-20


Changes in Supply (cont.)

• Even if the weather is perfect during thegrowing season, rain can still prevent theharvest from being gathered. Theweather, then, oftencauses a change insupply.

• The result is that thesupply curve is likelyto shift, causing theprice to go up ordown.

Figure 6.3a

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Section 2-21

• Because both demand and supply forfood is inelastic, a small change insupply is enough to cause a largechange in the price.

Changes in Supply (cont.)

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Section 2-22


Importance of Elasticity• What would happen to prices if the

demand for soybeans were highly elastic?The results wouldbe quite different.

• Because thisdemand curve ismuch more elastic,the prices wouldonly range from $8to $10 a bushelinstead of from $5 to$20 a bushel.

Figure 6.3b

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Section 2-23


Importance of Elasticity (cont.)

• Economists consider elasticity of demandwhenever a change in supply occurs.

• When a given change in supply is coupledwith an inelastic demand curve, pricechanges dramatically.

• When the same change in supply iscoupled with a very elastic demand curve,the change in price is much smaller.

54

Section 2-24


• A change in demand, like a change insupply, can also affect the price of a goodor service.

• All of the factors we examined inChapter 4–changes in income, tastes,prices of related products, expectations,and the number of consumers–affect themarket demand for goods and services.

Changes in Demand

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Section 2-25

Changes in Demand (cont.)

• One example isthe demand forgold. Figure 6.4shows whygold priceshave changedso dramaticallyover a 20-yearperiod.

Figure 6.4

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Section 2-26

• In 1980, risingprices, uncertaineconomicconditions, andother factorscreated a highdemand forgold, and theprice of goldreached $850per ounce.


Figure 6.4

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Section 2-27


Figure 6.4

• By the mid-1990s, acombination ofincreasedsupply andreduceddemand drovethe price of golddown to the$400 level.

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Section 2-28


Figure 6.4

• In early 1999, theBank of Englandannounced plansto sell slightlymore than half ofits official goldstock, causing thesupply curve toshift and the priceof gold to reach anew low of $280an ounce.

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Section 2-29



• However the price of gold fluctuates, onething is certain–everything depends on thedemand and the supply.

• Whenever economic conditions orpolitical instability threatens, people tendto increase their demand for gold anddrive the price up.

• Whenever the supply of gold increasesdramatically–as when a major holder ofgold like the Bank of England sells halfof its gold holdings–the supply of goldincreases, driving the price down.

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Section 2-30

The Competitive Price Theory


• The theory of competitive pricingrepresents a set of ideal conditions andoutcomes.

• The theory is important because it servesas a model by which to measure theperformance of other, less competitivemarket structures.

• Even so, many markets come reasonablyclose to the ideal.

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Section 2-31

The Competitive Price Theory (cont.)


• The prices of some foods such as milk,flour, bread, and many other items in yourcommunity will be relatively similar fromone store to the next.

• The great advantage of competitivemarkets is that they allocate resourcesefficiently.

• As sellers compete to meet consumerdemands, they are forced to lower theprice of their goods, which in turnencourages them to keep their costsdown.

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Section 2-32


The Competitive Price Theory (cont.)

• At the same time, competition amongbuyers helps prevent prices from fallingtoo far.

• In the final analysis, the market economyis one that “runs itself.”

63


Section Assessment

Main Idea Explain how a change indemand can affect prices.

Changes in income, tastes, and so onaffect demand and, therefore, price.




Describe how prices are determinedin a competitive market.

Prices are adjusted throughcompetition between buyers andsellers.


65



Explain why economic models areuseful.

They show how markets work byhelping analyze behavior and predictoutcomes.




Explain how different cases ofdemand and supply elasticity arerelated to price changes.

The more elastic, the smaller theprice change; the less elastic, thelarger the price change.


67



Understanding Cause and EffectWhat signal does a high price send tobuyers and sellers?

A high prices tells buyers that theyshould buy less and tells sellers theyshould offer more.




Making Inferences What domerchants usually do to sell items thatare overstocked? What does this tellyou about the equilibrium price for theproduct?

They lower the price of the items. Theequilibrium price is lower than thepresent price.


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Discuss the following:Price represents the balancing ofthe forces of demand and supply.

Section Close

End of Section 2


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Section 3-1



To achieve one or more of its social goals,government sometimes sets prices.

Reading StrategyGraphic Organizer As you read the section,complete a cause-and-effect chart similar to theone on page 150 of your textbook by explaininghow price ceilings affect quantity supplied.

72

Section 3-2


Key Terms

– minimum wage – price floor

– price ceiling

Study Guide (cont.)

– target price – nonrecourse loan – deficiency payment

ObjectivesAfter studying this section, you will be able to: – Describe the consequence of having a fixed

price in a market. – Explain how loan supports and deficiency

payments work. – Understand what is meant when “markets talk.”

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Section 3-3

Click the Speaker button tolisten to the Cover Story.

Section 3 begins on page 150 of your textbook.

Applying Economic ConceptsPrice Floor Chances are that you have workedfor the minimum wage at some time in your life.Why is this an example of a price floor?

Study Guide (cont.)

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Section 3-4


Introduction• Chapter 2 examined seven broad

economic and social goals that mostpeople seem to share.

• Attempts to achieve two of these goals–equity and security–usually require policiesthat distort market outcomes.

• In other words, we may have to give up alittle efficiency and freedom in order toachieve equity and security.

• Whether this is good or bad often dependson a person’s perspective.

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Section 3-5


Introduction (cont.)

• After all, the person who receives a subsidyis more likely to support it than is thetaxpayer who pays for it.

• In general, it is usually wise to evaluateeach situation on its own merits, as thebenefits of a program may well exceed thecosts.

• What is common to all of these situations,however, is that the outcomes can beachieved only at the cost of interfering withthe market.

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Section 3-6


Distorting Market Outcomes • One of the common ways of achieving

social goals involves setting prices at“socially desirable” levels.

• When this happens, prices are not allowedto adjust to their equilibrium levels, and theprice system cannot transmit accurateinformation to other buyers and sellers inthe market.

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Section 3-7


• A price ceiling is a maximum legal pricethat can be charged for a product.

• For example,without the priceceiling, the marketestablishesmonthly rents at$900, which is anequilibrium pricebecause 2 millionapartments wouldbe supplied andrented at that rate.

Price Ceilings

Figure 6.5a

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Section 3-8

Price Ceilings (cont.)

• If authorities think $900 is too high, and ifthey want to achieve the social goals ofequity andsecurity forpeople whocannot affordthese rents, theycan establish,arbitrarily, a priceceiling at $600a month.

Figure 6.5a

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Section 3-9

• Demand for apartments would increase.Landlords, on the other hand, would try toconvert someapartments toother uses,leaving ashortage of800,000apartments.


Figure 6.5a

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Section 3-10


• The price ceiling, like any other price,affects the allocation of resources–but notin the way intended.

• The attempt to limit rents makes somepeople happy, until their buildings begin todeteriorate.

• Others, including landlords and potentialrenters on waiting lists, are unhappy fromthe beginning.

• Finally, some scarce resources–those usedto build and maintain apartments–areslowly shifted out of the rental market.


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Section 3-11


Price Floors• Other prices often are considered too low

and so steps are taken to keep themhigher.

• The minimum wage, the lowest legal wagethat can be paid to most workers, is a casein point.

• The minimum wage is actually a pricefloor, or lowest legal price that can be paidfor a good or service.

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Section 3-12


Price Floors (cont.)

• For example, use a minimum wage of$5.15 per hour as an illustration of a pricefloor.

• At this wage, thesupply curveshows that 14million peoplewould want tooffer theirservices.

Figure 6.5b

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Section 3-13

• According to the demand curve for labor,however, only 10 million would behired–leaving asurplus of 4 millionworkers.


Figure 6.5b

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Section 3-14

• Some economists argue that the minimumwage actually increases the number ofpeople who do not have jobs becauseemployers hire fewer workers.


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Section 3-15


Agricultural Price Supports• In the 1930s, the federal government

established the Commodity CreditCorporation (CCC), an agency in theDepartment of Agriculture, to help stabilizeagricultural prices.

• The stabilization took two basic forms–thefirst involved loan supports, and the secondinvolved deficiency payments.

• Both made use of a target price, which isessentially a price floor for farm products.

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Section 3-16

• Under theloan supportprogram, afarmer borrowedmoney from theCCC at thetarget price andpledged his orher crops assecurity inreturn.

Loan Supports (cont.)

Figure 6.6a

87

Section 3-16

• Because the loan was a nonrecourseloan–a loan that carries neither a penaltynor further obligation to repay if not paidback–the farmer could get at least thetarget price for his or her crops.

Loan Supports

88

Section 3-17


• The CCC loan program created problemsbecause the U.S. Department of Agriculturesoon owned enormous stockpiles of food.

• The solution was to have farmers sell theircrops on the open market for the best pricethey could get and then have the CCCmake up the difference with a deficiencypayment–a check sent to producers thatmakes up the difference between the actualmarket price and the target price.

Deficiency Payments

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Section 3-18

Deficiency Payments (cont.)

• For example,under adeficiencypaymentprogram, thefarmer made$25,000 byselling 10,000bushels at$2.50 each onthe openmarket.

Figure 6.6b

90

Section 3-19


• In an effort to make agricultural outputresponsive to market forces,Congress passed the FederalAgricultural Improvement and Reform(FAIR) Act of 1996.

• Under this law, eligible producers of grains,cotton, and rice can enter into a seven-yearprogram that allows them almost completeflexibility to plant any crop on any land.

• Under FAIR, cash payments take the placeof price supports and deficiency payments.

Reforming Price Supports

91

Section 3-20


Reforming Price Supports (cont.)

• Because these new payments have turnedout to be as large as the ones theyreplaced, however, the overall cost of farmprograms has not gone down.

• When the program expires in the year2002, farmers will cease to receive allpayments.

• If farm income is still down when the billexpires, Congress may decide to bring farmsupport back–thereby choosing the goal ofeconomic security over efficiency.

92

Section 3-21


• Markets are impersonal mechanisms thatbring buyers and sellers together.

• Although markets do not talk in the usualsense of the word, they do communicate inthat they speak collectively for all of thebuyers and sellers who trade in themarkets.

• Markets are said to talk when prices inthem move up or down significantly.

When Markets Talk

93


Section Assessment

Main Idea Using your notes from thegraphic organizer activity on page 150of your textbook, describe why priceceilings are often set.Price ceilings are set to achieveequity and security.





Describe two effects of having a fixedprice other than the equilibrium priceforced on a market.

Shortages result if prices are setbelow equilibrium. Surpluses result ifprices are set above it.

95




Explain how loan supports anddeficiency payments work.

Loan supports allow farmers toborrow against crops. Deficiencypayments supply farmers with checksfor the difference between the targetprice and the actual price.

96




Describe how markets speakcollectively for buyers and sellers.

The significant movements of prices,either up or down, signals thecollective decisions.

97




Price Floor Would small businessesbe more affected by a change in theminimum wage than large businesses?Explain your answer.Salaries represent a largerpercentage of costs for smallbusinesses.

98




Understanding Cause and Effect The priceof fresh fruit over the course of a year may goup or down by as much as 100 percent.Explain the causes for these changes interms of changes in demand, changes insupply, and the elasticity of demand for freshfruit.

Supply is affected by seasons and byweather. Because demand tends to bestable and slightly inelastic, a change insupply can cause a large change in price.

99


Prices can be viewed as signals.Create a logo or symbol thatillustrates this idea.

Section Close

End of Section 3


101

Chapter Summary 1

Section 1: Prices as Signals


• Prices serve as signals to both producers andconsumers. In doing so, they help decide thethree basic WHAT, HOW, and FOR WHOMquestions that all societies face.

• High prices are signals for businesses to producemore and for consumers to buy less. Low pricesare signals for businesses to produce less and forconsumers to buy more.

• Prices have the advantages of neutrality, flexibility,efficiency, and clarity.

102

Chapter Summary 2


Section 1: Prices as Signals (cont.)

• Other nonprice allocation methods such asrationing can be used. Under such a system,people receive ration coupons, which are similarto tickets or receipts that entitle the holder topurchase a certain amount of a product.

• Nonprice allocation systems suffer from problemsregarding fairness, high administrative costs, anddiminished incentives to work and produce.

• A market economy is made up of many differentmarkets, and different prices prevail in each. Achange in price in one market affects more thanthe allocation of resources in that market. It alsoaffects the allocation of resources betweenmarkets.

103

Chapter Summary 3


Section 2: The Price System at Work• Economists often use an economic model to

help analyze behavior and predict outcomes.Models of economic markets are oftenrepresented with supply and demand curves inorder to examine the concept of marketequilibrium, a situation in which prices arerelatively stable, and the quantity of outputsupplied is equal to the quantity demanded.

• In a competitive market, prices are established bythe forces of supply and demand. If the price is toohigh, a temporary surplus appears until the pricegoes down. If the price is too low, a temporaryshortage appears until the price rises. Eventuallythe market reaches the equilibrium price wherethere is neither a shortage nor a surplus.

104

Chapter Summary 4


Section 2: The Price System atWork (cont.)

• A change in price can be caused by a change insupply or a change in demand. The size of theprice change is affected by the elasticity of bothcurves. The more elastic the curves, the smallerthe price change; the less elastic the curves, thelarger the price change.

• The theory of competitive pricing represents a setof ideal conditions and outcomes. The theoryserves as a model by which to measure theperformance of other, less competitive markets.Because of this, absolutely pure competition is notneeded for the theory of competitive pricing to bepractical.

105

Chapter Summary 5


Section 3: Social Goals vs. MarketEfficiency

• Governments sometimes fix prices at levels aboveor below the equilibrium price to achieve the socialgoals of equity and security.

• If the fixed price is a price ceiling, as in the caseof rent controls, a shortage usually appears for aslong as the price remains fixed below theequilibrium price.

• Agricultural price supports were introduced duringthe 1930s to support farm incomes. Nonrecourseloan support programs allowed farmers to borrowagainst crops, and then keep the loan and forfeitthe crop if market prices were low.

106

Chapter Summary 6

Section 3: Social Goals vs. MarketEfficiency (cont.)

• Later, deficiency payments were used, supplyingthe farmer with a check that made up thedifference between the target price and theactual price received for the product.

End of Chapter Summary

Click the mouse button to return to the Contents slide.108

Cause: The government tries to keep prices down bylegislating price ceilings. Effect: ______Cause: The government wants to allocate scarcegoods and services without the help of a pricesystem. Effect: ______Cause: A reasonably competitive market is experiencingalternating, yet consecutively smaller, surpluses andshortages. Effect: ______

Click the mouse button or press the Space Bar to display theanswer. The Chapter Assessment is on pages 158–159.

Chapter Assessment 1

Identifying Key TermsIdentify the key term that is an effect of the five causes stated below.Some causes may have more than one effect.

D

A

E

A. rationing E. equilibrium priceB. economic model F. loss leaderC. surplus G. price ceilingD. shortage H. price floor

109



Identifying Key Terms (cont.)Identify the key term that is an effect of the five causes stated below.Some causes may have more than one effect.

Cause: People decide that farmers should receive ahigher price for milk and cheese, so a price floor for theseproducts is established. Effect: ______Cause: A market is at equilibrium, but the product fallsout of style before producers can reduce production.Effect: ______

C

C

A. rationing E. equilibrium priceB. economic model F. loss leaderC. surplus G. price ceilingD. shortage H. price floor

110



Describe four advantages of usingprice as an allocating mechanism.

Prices are neutral, favoring neitherproducer nor consumer, and flexible,allowing the market economy toaccommodate change. Prices haveno administrative costs and areefficient because they are understoodby all.

Reviewing the Facts

111



List three problems of allocatinggoods and services using nonprice-related methods.

establishing fair system of allocation;cost of administering system; negativeimpact system has on incentive towork and produce

Reviewing the Facts (cont.)

112




Cite an example of an economicmodel used in this chapter.

Examples may include graphs ofsupply and demand curves.

113




Explain the role of shortages andsurpluses in competitive markets.

shortage: the quantity demanded isgreater than the quantity supplied at agiven price, and prices will go up;surplus: the quantity supplied isgreater than the quantity demanded,and prices will go down

114




Describe three causes of a pricechange in a market.

a change in supply, a change indemand, or a change in both

115




Explain why shortages andsurpluses are not temporary whenprice controls are used.

At lower prices there is no incentivefor producers to produce more, soshortages continue. At higher pricesthere is no incentive to buy, sosurpluses remain.

116




Identify two programs that havehistorically been used to stabilizefarm incomes.

loan supports, deficiency payments

117




Explain what is meant by thestatement that markets “talk.”

The significant movement of prices upor down reflects the judgments of allbuyers and sellers in the market.Enough buyers or sellers causesignificant price movements thatcommunicate to all buyers andsellers.

118



Thinking Critically

Making Generalizations Somepeople argue that the minimumwage is not a fair price. Use a weblike the one on page 158 of yourtextbook to help you identifyreasons for this argument. Explainwhy you agree or disagree.

Answers will vary.

119



Thinking Critically (cont.)

Making Predictions Suppose that your state wantedto make health care more affordable for everyone.To do this, state legislators put a series of pricecontrols–price ceilings–in place that cut the cost ofmedical services in half. What would happen to thedemand for medical services at the new, lowerprice? What would happen to the supply of medicalservices that doctors would be willing to provide atthe new, lower price? Where do you think newdoctors would prefer to set up practice? Explainthe reasons for your answers.Because demand for medical services tends to beinelastic, the quantity demanded will increase onlymoderately. Because prices for services would be setbelow market level, there would be less incentive fordoctors to offer services. Quantity supplied wouldprobably decrease. New doctors might want to set uppractice in states where there were no price ceilings.

120



Applying Economic Skills

Rationing Suppose that a guestspeaker visited your class and left20 ballpoint pens as samples–notknowing that there were 30 studentsin the class. Devise a nonpricerationing system that would fairlyallocate the scarce item to everyonein the class.Rationing systems will vary.

121



Applying Economic Skills (cont.)

Equilibrium Price Many people feel that theminimum wage is too low. If it increased by $1 perhour, what would happen to the number ofstudents who would want to work after school?What would happen to the number of workers thatstores in your community would want to hire?Would the combination of these factors cause ashortage or a surplus of workers in yourcommunity? Provide an explanation for each ofyour answers.

At a higher minimum wage, there would be moreincentive for workers to sell their labor. The numberof students wanting to work after school wouldincrease. The higher cost of labor would result instore managers hiring fewer workers, so there mightbe a surplus of workers.

122


Identify what will happen to prices in thefollowing situations: (1) Supply decreasesand demand is elastic. (2) Supplyincreases and demand is inelastic. (3) Asurplus exists. (4) Supply remainsconstant but demand increases. (5) Ashortage exists.

(1) prices rise slightly; (2) prices fallmarkedly; (3) prices fall; (4) prices rise; (5)prices rise


End of Chapter Assessment


Economic Concepts 1

Focus Activity 1.1

Continued on next slide.

Focus Activity 1.2

Focus Activity 2.1


Focus Activity 2.2

Focus Activity 3.1


Focus Activity 3.2

Extra Credit Project

Write an essay on the role that prices play in themarket economy. Illustrate your essay withexamples, charts, and graphs. Present anddiscuss your essay.

Economics Online

Explore online information about thetopics introduced in this chapter.

Click on the Connect button to launch your browser and go to theEconomics: Principles and Practices Web site. At this site, youwill find interactive activities, current events information, and Websites correlated with the chapters and units in the textbook.When you finish exploring, exit the browser program to return tothis presentation. If you experience difficulty connecting to theWeb site, manually launch your Web browser and go tohttp://epp.glencoe.com

BusinessWeek Online

Explore online information about thetopics introduced in this chapter.

Click on the Connect button to launch your browser and go to theBusinessWeek Web site. At this site, you will find up-to-dateinformation dealing with all aspects of economics. When youfinish exploring, exit the browser program to return to thispresentation. If you experience difficulty connecting to the Website, manually launch your Web browser and go tohttp://www.businessweek.com

Infobyte 3

Consumer Confidence A statistic called theConsumer Confidence Index attempts to gaugeconsumers’ feelings about the current conditionof the economy and their expectations about theeconomy’s future direction. The index isweighted 60% in favor of expectations and 40%in favor of current conditions. Large movementsin this index indicate or signal changes inconsumer spending patterns.

GE 1

Comparing Food Prices The top ten countriesin terms of cost of living are, in order fromhighest to lowest: Japan, Hong Kong, Russia,Norway, Switzerland, France, Gabon, UnitedKingdom, Singapore, and Taiwan. The UnitedStates is ranked 17th in cost of living.

GE 2

The Price of Ivory In 1989, Kenyan presidentDaniel Arap Moi ordered officials to burn 2,400African elephant tusks that had been confiscatedfrom poachers. Some economists were very criticalof this policy. By reducing the supply of tusks on theworld market, they argued, the price of ivory rose onworld markets. This provided a stronger incentive forpoachers to kill more elephants. Other economistsargued that burning the tusks generated a lot ofpublicity about the plight of African elephants, andmay have decreased demand for ivory.

Economists sometimes refer to a surplus asexcess supply and a shortage as excessdemand.

FYI 2 Cybernomics 3.1

Outside the Law In the case of body organs, thegovernment has imposed a price control of zero.While people are allowed to donate organs upontheir death, anyone caught selling human organscan get up to five years in prison or a $50,000fine. Price controls like this, however, oftenengender black markets. In 1999, for example,someone offered to sell a kidney on eBay, anonline auction site. The bidding rose to $5.7million before eBay cancelled the illegal auction.

BW Newsclip 1


Many considerations are involved in an individual’schoice of jobs. These include not only whether andhow much to work, but where to work.Read the BusinessWeek Newsclip article on page156 of your textbook. Think about what influencesaffect labor demand. What influences affect labormobility?

Doctors: ChartingNew Territory

This feature is found on page 156 of your textbook. Clickthe Speaker button to listen to an audio introduction.


BW Newsclip 2


Sequencing Information What trenddoes the RAND research show regardingdoctors’ choices of location?RAND research shows that generalistsand specialists are settling in metro areaswith low HMO penetration.

Click the mouse button or press the Space Bar to display theanswer. This feature is found on page 156 of your textbook.




BW Newsclip 3

Finding the Main Idea What theorydo the researchers offer to supportthis relocation trend?Doctors are trying to avoid HMOs becausethese organizations often curb thedemand for their services.



BW Newsclip 4

Understanding Cause and Effect Do youthink the theory is the best explanationfor the trend? What other factors affectwhere doctors locate their practices?

Answers will vary.

NBR 1.1

• Explain how prices are determined by the forces ofsupply and demand.

• Understand how and why producers use rebates tospur demand.

• Define and explain the goal of a cartel. • Outline the dynamics of price fluctuation in the

agricultural market.

After viewing The Price System at Work, you should beable to:

Economics and YouVideo 12: The Price System

at Work




at Work

NBR 1.2

Side 1Disc 1

Chapter 12Click the Videodisc buttonanytime throughout thissection to play the completevideo if you have a videodiscplayer attached to yourcomputer.

Click the Forward button toview the discussion questionsand other related slides.


Click inside this box to play the preview.

NBR 1.3

Side 1Disc 1

Chapter 12


What role did the incentives andrebates play in consumers’willingness to buy automobiles?By reducing the final prices of theautomobiles, the rebates andincentives had a positive effect onconsumer demand for cars.


at Work

CTS 1


Synthesizing information involves integratinginformation from two or more sources. Theability to synthesize, or combine, informationis important because information gained fromone source often sheds new light upon otherinformation.

This feature is found on page 149 of your textbook.

Synthesizing Information

CTS 2


Learning the Skill


• Analyze each source separately to understand itsmeaning.

• Determine what information each source adds to thesubject.

• Identify points of agreement and disagreementbetween the sources. Ask: Can Source A give menew information or new ways of thinking aboutSource B?

Click the mouse button or press the Space Bar to display theinformation. This feature is found on page 149 of your textbook.

CTS 3


Learning the Skill (cont.)


• Find relationships between the information in thesources.


CTS 4


Practicing the Skill


• Study the sources on page 149 of your textbook, thenanswer the questions on the following slides.


CTS 5




What is the main subject of eachexcerpt?

Source A is about the consumer’sdecision to either borrow money for a newcar, or to pay cash for a less expensiveused car. Source B is about borrowingand buying on credit.

CTS 6



What kind of information doesSource A add to this subject?

Source A adds research results, andadvantages and disadvantages.


CTS 7



What kind of information doesSource B add to this subject?

Source B considers consumers’ feelingsand opinions.


CTS 8



Does Source B support or contradictSource A? Explain.

Both Sources A and B provide informationabout the economic decision of whether tomake purchases using credit.


CTS 9



Summarize what you have learnedfrom both sources.

Answers will vary.

Profiles in Economics 1.1

This feature is found on page 141 of yourtextbook.


Gary Becker1930–

Milton Friedman1912–

Click a picture tolearn more aboutGary Becker orMilton Friedman.Be prepared toanswer thequestions thatappear on thenext two slides.


Making Comparisons How are Becker’s andFriedman’s ideas similar and different?

Becker’s and Friedman’s ideas are similar in thatthey view economic conditions and decisions asfundamental to other aspects of life; they differ inthat Becker focuses on the micro, specifically thedecision-making of individuals, while Friedmanfocuses on the macro, specifically the importanceof the supply of money or monetary policy.





For Further Research Read an articleor book by Becker or Friedman.Present a summary of the work to theclass.Answers will vary.

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Economics and You CHAPTER INTRODUCTION SECTION 1 SECTION 2 ...web1.nusd.k12.az.us/schools/nhs/gthomson.class/gov.reg/gov_09_10... · Chapter Introduction 2 Chapter Objectives