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Prices by hedongchenchen

VIEWS: 3 PAGES: 16

									                                      PRICES, PRICING

I. Where do Market prices come from?
       A. subjective values and actions of the individuals
       B. direct goods and services to the persons who value them most
       C. “market price” to “clear the market”
       D. high prices
       E. low prices
       F. prices always determined by the choices and preferences of individuals in a free
       market

II. The market economy = many auctions
        A. Auctions are taking place all the time
               1. “on the auction block”
               2. advertisements
               3. scales of values
        B. Market prices emerge from the specific purchases, and/or refusals to purchase
        C. Three examples to illustrate
               1. Some questions
                       a. How many trades will result under the assumed conditions?
                       b. What are the limits within which the market price will fall
               2. Problem A: competitive market
a. The process
        $2,600—10 potential buyers will clamor to purchase, but only a
        single cab will be offered
        $2,800—9 eager buyers want to buy, but only 2 cabs will come on
        the market
        $3,050—8 potential buyers are willing to pay that much, but only 3
        cabs will appear on the market
        $3,130—7 would-be purchasers are bidding, but only the same 3
        cabs are offered by their current owners
        $3,250—6 would-be buyers are now in the market, but only 4
        owners of cabs are willing to sell—too few to satisfy the demand at
        this price
        $3,300—6 would-be purchasers are still bidding and a 5th owner is
        now ready to sell, but this is still one short of satisfying the market
        demand at this price
        $3,360-$3,379.99—SOLD!
b. to “clear the market,” the price must be:
        1) more than $3,130
        2) less than $3,400
c. between $3,360 and $3,380 as follows:
        3) $3,360 or more
        4) less than $3,380
d. prices up to the margin
e. prices down to the margin
f. between $3,360 and $3,379.99
3. Problem B: a sellers’ market




4. Problem 3: Buyers’ Market
III. Review
        A. Basic assumptions
               1. Economics: study of the conscious, purposive actions of individuals to relieve
               some “felt uneasiness” and thus to accomplish the most urgent goal on his or her
               personal scale of subjective values.
                       a. “ordered universe”
                                1) Regularity
                                2) Logic
                                3) Causality
                                4) Time
                                5) Change
                                6) Value
                       b. all acting individuals
                                1) act purposively to attain ends
                                2) wants are endless
                                3) means are limited
                                4) values are personal (subjective)
                                5) ideas, values and goals are always changing
                                6) may make mistakes
                                7) aiming at what most important
                                8) “economize”
                       c. Three conditions
                                1) dissatisfaction, a “felt uneasiness”
                                2) idea
                                3) hope
                       d. There are three requirements for acting.
                                1) Planning
                                2) Time
                                3) Necessary resources (tools, knowledge, etc.)
               2. Find easier and better ways
                       a. to acquire, hold and use private property
                       b. specializing, cooperating and exchanging
                       c. economic concepts follow “naturally” and logically
                                1) Private Property
                                2) Specialization and Division of Labor
                                3) Exchange
                                4) Social Cooperation
                                5) Markets
               3. Economic theory: to explain complex modern market economy
        B. Every individual always aims at what he wants most
               1. An individual's urgency, or indifference affect “price”
               2. Everyone always weighing relative worth
                       a. what he wants
                       b. what he has
               3. Different list of wants and scale of values
               4. more eager buyers
              5. more eager sellers
              6. market price of any definite quantity of a good or service
                      a. a particular time and place
                      b. different viewpoints
                      c. willing exchange results
       C. diamonds vs. water
              1. “paradox of value”
              2. A particular place and time
              3. urgency of the individual's demand under the circumstances
              4. scarcity + utility
       D. How does an individual decide among many possible alternatives?
              1. at any moment
              2. “bite-sized” pieces or stages
              3. acts only when the satisfaction is better
              4. “marginal utility”
              5. “marginal unit”
                      a. “A horse! A horse! My kingdom for a horse!”
                              WILLIAM SHAKESPEARE, Richard III (ACT V, SCENE IV)
                              1) What is the marginal unit?
                              2) What is its marginal utility?
                              3) What is the value of this marginal unit?
                      b. “A little Neglect may breed great Mischief: for want of a Nail the Shoe
                      was lost; for want of a Shoe the Horse was lost; and for want of a Horse
                      the Rider was lost, being overtaken and slain by the Enemy; all for want of
                      Care about a Horse-shoe Nail.”
                              BENJAMIN FRANKLIN, MAXIMS PREFIXED TO Poor
                              Richards Almanac (1757)
                              1) What is the marginal unit?
                              2) What is its marginal utility?
                              3) What is the value of this marginal unit?
                      c. submarginal
                      d. psychic price

IV. How do the ideas and values of countless individuals lead in time to market prices?
      A. The economy = uncounted billions of individual value judgments and actions
      B. How do the ideas, values, choices and actions of an individual help to determine the
      pattern of production?
      C. How do the ideas, choices and actions of individuals help to determine market prices?
              1. sellers continually experiment to discover the “market price”
              2. Charts, graphs and computers offer no help
              3. past experience but current situations

V. Equilibrium Price
       A. Alfred Marshall:
              1. when supply and demand meets in the marketplace, a market price is
              created
              2. Marshallian Cross
       B. Equilibrium price
       C. Market clearing or market price
       D. No such thing: there is NO equilibrium
       E. constant movement +/-: that is competition
       Quantity Demanded                      Price                 Quantity Supplied

                16                           $.50                           0
                12                           1.00                           4
                 8                           1.50                           8
                 4                           2.00                          12
                 0                           2.50                          16


Supply and Demand Curves




Do not say supply equals demand, merely supply and demand intersects at price x and quantity
Y.
                       Equilibrium Quantity and Price




     What happens if the price is $10?
     What happens if the price is $6?
     What happens if the price is $8?

       Unit 3: Microeconomics                                 Visual 1.9
                        Shifts in Demand and Supply
       National Council on Economic Education   http://apeconomics.ncee.net




      Unit 3: Microeconomics                     Visual 2.6
      National Council on Economic Education     http://apeconomics.ncee.net
Changes in Supply and Demand, and Equilibrium
      A. Changing demand with supply held constant:
             1. Increase in demand will increase equilibrium price and quantity
             2. Decrease in demand will decrease equilibrium price and quantity
      B. Changing supply with demand held constant:
             1. Increase in supply will decrease equilibrium price and increasing quantity
                2. Decrease in supply will increase equilibrium price and decreasing quantity
          C. Complex cases—when both supply and demand shift:
                1. If supply increases and demand decreases, price declines
                2. If supply decreases and demand increases, price rises
                3. If supply and demand change in the same direction, quantity will be in the
                direction of the shift
          D. A Reminder: Other things equal:
                1. Demand: inverse
                2. Supply: direct relationship
                3. Be careful of time
                4. Many factors other than price

Elasticity describes the responsiveness to price changes

5 types
Categories of Elasticity

1. Perfectly Elastic

2. Elastic

3. Unitary Elastic

4. Inelastic

5. Perfectly Inelastic

               Qualities That Affect Elasticity of
                           Demand




      Unit 3: Microeconomics                   Visual 2.7
      National Council on Economic Education   http://apeconomics.ncee.net
Elasticity and Total Revenue

The total receipts test for demand
     Estimating Elasticity of Demand

                                    ECONOMIC PRODUCTS
Determinants Tomatoes T-bone Table       Gasoline Gasoline      Services    Insulin     Butter
Elasticity             steak   salt      form a     in          of
                                         Particular General     Medical
                                         station                Doctor
Can purchase Yes       Yes     No        Yes        No          No          No          Yes
be delayed?
Yes (elastic)
No (inelastic)
Are there      Yes     Yes     No        Yes        No          No          No          Yes
adequate
substitutes?
Yes (elastic)
No (inelastic)
               No
Does purchase use a    No      No        Yes        Yes         Yes         No          No
large portion
of income?
Yes (elastic)
No (inelastic)
Type of        Elastic Elastic Inelastic Elastic    Inelastic   Inelastic   Inelastic   Elastic
Elasticity



     Characteristics that Affect Elasticity

     A) Nature of the product

     B) Durability of the product

     C) Size of the expenditure

     D) Substitute goods

     E) Complementary goods

     F) Time
Characteristics of Elastic and Inelastic Goods.

Elastic                          Inelastic

durable                        non-durable

expensive                      inexpensive

luxuries                       necessities

substitute goods               complementary goods

The Midpoint Formula

Price per candy bar Q demanded per week Total Revenue                  Elasticity Coefficient
            .40                 3                 $1.20
            .35                 4                 $1.40
            .30                 5                 $1.50
            .25                 6                 $1.50
            .20                 7                 $1.40
            .15                 8                 $1.20

 Mid point formula

 The elasticity ( ) formula used is:

                                      = ( Q / Q0) / ( P / P0)
                                      where Q = Q1 -Q0
                                       and P = P1 - P0

Note: The mid-point formula will provide more accurate results for cases when the
sign of marginal revenue changes along the segment in question. The mid-point
formula is:

                           = ( Q / [(Q0+Q1)/2]) / ( P / [(P0+P1)/2])

where Q0 = initial or old quantity

          Q1 = final or new quantity

          P0 = initial or old price

          P1 = final or new price
Price elasticity of demand     Demand curve is            Rise in the price will       Fall in the price will
                  >1           elastic                    decrease the revenue         increase the revenue
                  =1           unitary elastic            not change the revenue       not change the revenue
                  <1           inelastic                  increase the revenue         decrease the revenue

    Price Elasticity of Supply
           A) Producers respond to changes in price.
                     1) What factors most affect elasticity of supply?
                             a) Willingness
                             b) Ability (Capacity)
                             c) Time
           B) The more inelastic, the more prices can fluctuate
           C) Elastic Supply
                     1) products quickly made
                     2) inexpensive goods and services
                     3) readily available inputs
           D) Inelastic supply
                     1) take a long time to produce
                     2) Expensive to produce
                     3) limited or lots of competition for inputs
           E) perfectly inelastic e=0               vertical line
           F) perfectly elastic e=∞                 horizontal line
           G) unit elastic e=1                      crosses at (0,0)
           H) elastic e>1                           crosses x above (0,0)
           i) inelastic e<1                         cross y before (0,0)


                     Effects of Different Demand Elasticities




                                    Which demand curve is more inelastic?
                                    What happens to the equilibrium price and quantity
                                    with an elastic demand curve if supply increases?
                                  What happens to the equilibrium price and quantity
                                  with an inelastic demand curve if supply increases?
                 Unit 3: Microeconomics                                    Visual 1.12
                 National Council on Economic Education                     http://apeconomics.ncee.net
                                   Price Ceilings and Floors

Price Floor




Problems: surplus, inefficiencies, wasted resources, encourage illegal activity

Case Study: Agricultural Price Support

destroying the crops or bribing the farmers not to produce, higher taxes
Price Ceilings

There are four alternatives to the market as a way of allocating a scarce good:
   standing in line
   preferred customers
   coupon rationing
   black markets
Case Study: Lines at the Gas Pump

In 1973, OPEC raised the price of crude oil which led to a reduction in the supply of gasoline.
The federal government put price ceilings into place which further increased shortages.
Motorists were then forced to spend large amounts of time in line at the gas pump (which is how
the gas was rationed.) These people waiting in line could have been doing something more
enjoyable or productive.




RECOMMENDED READINGS

JA Chapter 5
Chapter 6 Economic Reasoning
Chapter 7 Economic Reasoning
Graying of America, EPI
Smog Merchants, EPI
Greenhouse Economics, EPI
Heavenly Highway, EPI
If Men were Free to Trade, John C. Sparks
For the Good of the Others, Leonard E. Read
Food from Thought, Charles W. Williams

Movies: The River

								
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