Economics 4405 www.msu.edumilewsk6

1
Economics 4/4/05 www.msu.edu/milewsk6

• OBJECTIVE Begin examination of prices as
  signals.
• I. Journal24 pt.A
• -Read Too Much to Bear 1F-2F
• -1.) Why might rising oil prices cause a domino
  effect in prices?
• -2.) How is the Federal Reserve Bank going to
  combat inflation?
• II. Journal24 pt.B
• -notes on prices
• III. Homework Due Friday 4/8/05
• 1.) Read Chapter 6 section 1 p.137-140
• -Answer questions (3-6) p.140
• 2.) Read Chapter 6 section2 p.142-148
• -Answer questions (3-6) p. 148
• 3.) Progress Report
• Journals (16-24) Due Tomorrow!!!

2
The Week Ahead

• Today 4/4/05 Journal24
• Tuesday 4/5/05 Journals (16-24) Due
• Wednesday 4/6/05
• -MEAP Writing 747-946AM
• -Hours (3,4,5,6) 951AM-225PM
• Thursday 4/7/05
• -MEAP Math 747-946AM
• -Hours (1,2,5,6) 951AM-225PM
• Friday 4/8/05
• -3rd Marking Period Ends
• -Homework Due

3
Prices as Signals

• Price the monetary value of a product as
  established by supply and demand.
• Price is a signal that helps us make economic
  decisions.
• High prices are a signal for producers to produce
  more and consumers to buy less.
• Low prices are a signal for producers to produce
  less and consumers to buy more.

4
Advantages of Prices

• 1.) Prices in a competitive market favor neither
  the producer nor the consumer
• 2.) Prices in a market economy are flexible.
• 3.) Prices have no administrative costs and
  answer the question WHAT, HOW, and for WHOM to
  produce.
• 4.) You have known it your entire life!

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How is price determined?

• Price is determined by the intersection of the
  supply and demand curves.

6
Life without prices?

• Prices help allocate scarce resources, but what
  if there was no such thing as price?
• Rationing the government determines everyones
  fair share.
• Problem with determining what is fair
• High administrative stuff
• No incentive to work hard

7
Price Adjustment Process

• Because transactions in a market economy are
  voluntary, the compromise that eventually takes
  place must be to the benefit of both parties, or
  the compromise would not occur in the first
  place. p.142

8
Market Equilibrium

• When prices are relatively stable, and the
  quantity of goods and services supplied is equal
  to the quantity demanded.

9
The Price Adjustment Process
10
Surplus Shortage

• Surplus a situation in which the quantity
  supplied is greater than the quantity demanded at
  a given price.
• Shortage a situation in which the quantity
  demanded is greater than the quantity supplied at
  a given price.

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Economics 4/5/05 www.msu.edu/milewsk6

• OBJECTIVE Begin examination of prices as
  signals.
• I. Journal25 pt.A
• Read The Global Economy p.138
• Answer questions (1-2) p.138
• II. Journal25 pt.B
• -notes on prices
• III. Homework Due Friday 4/8/05
• 1.) Read Chapter 6 section 1 p.137-140
• -Answer questions (3-6) p.140
• 2.) Read Chapter 6 section2 p.142-148
• -Answer questions (3-6) p. 148
• 3.) Progress Report
• Journals (16-24) Due Today!!!

12
Explaining and Predicting Prices

• Economists use their market models to explain how
  the world around us works and to predict how
  certain events such as changes in prices might
  occur.

• A change in price is normally the result of a
  change in supply, a change in demand, or changes
  in both.
• Elasticity of demand is also important when
  predicting prices.

13
Inelastic Demand v. Elastic Demand
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Change in Demand

• A change in demand, like a change in supply, can
  also affect the price of a good or service.
• All of the factors we examined in Chapter
  4changes in income, tastes, prices of related
  products, expectations, and the number of
  consumersaffect the market demand for goods and
  services.

15
Demand for Gold

• One example is the demand for gold. Figure 6.4
  shows why gold prices have changed so
  dramatically over a 20-year period.

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Why Gold Prices Fell

• Whenever economic conditions or political
  instability threatens, people tend to increase
  their demand for gold and drive the price up.
• Whenever the supply of gold increases
  dramaticallyas when a major holder of gold like
  the Bank of England sells half of its gold
  holdingsthe supply of gold increases, driving
  the price down.
• Current price of gold 423.90

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Economics 4/6 or 4/7/05 www.msu.edu/milewsk6

• OBJECTIVE Examine prices as signals.
• I. Journal26
• -Read Profiles in Economics p.141
• Answer questions (1) p.141
• (cost of raising kids)
• -Read Turing Manure into Black Gold
• -Answer the following questions
• 1.) What are the reasons cited for a rise in
  crude oil prices?
• 2.) Why are we currently not using animal waste
  for fuel?
• 3.) Why could we be using animal waste for fuel
  in the future?
• II. Econ Lab
• -The Price of Oil

18
Economics 4/8/05 www.msu.edu/milewsk6

• OBJECTIVE Examine prices as signal in the real
  estate and crude oil markets.
• I. Journal27
• -Questions on NBR segments 5,6 7 (video)
• II. Complete Econ Lab

19
NBR segments 5,6 7

• 1.) Why did people flock to Mercedes dealerships
  in 1998?
• 2.) Why did farmers adjust their milk production
  following the holiday season of 1998?
• 3.) Why did Kodak cut jobs in 1999?
• 4.) What does leaner meaner mean?
• 5.) What happened to the price of vacation homes
  in Michigan?
• 6.) Is demand for vacation homes elastic or
  inelastic? What about prescription medications?