I hope class yesterday was more straightforward and that you took more away from it than lesson 7. We aren't quite as far along as other sections but I asked you to consider the question about battery prices after a hurricane. Should we ensure that there is no one "taking advantage" of consumers by setting prices? why or why not? Think about the SUBARU example and the role of prices and the principles in your answer.
Points to take way:
Points to take way:
- Prices send signals, when we mess with prices we mess with those signals.
- Prices adjust in order to move the market and they change for a variety of reasons either
- Supply changes: some underlying cause moves the whole function of supply which makes producers desire to produce more or less at all prices. The way to tell if you are thinking about this properly is to ask yourself the question: "If prices stayed the same would I produce more/less of the product?"
- the answer is yes if, for example, it gets cheaper/more expensive to produce something
- if you find your self saying "because prices changed supply changes" just stop. it is correct that a producer will make less but that is just the law of supply (movement along the curve) not a change in supply (a change of the curve itself)
- Demand Changes: some underlying cause moves the whole function of demand which makes buyers desire to buy more or less at all prices. The way to tell if you are thinking about this properly is to ask yourself the question: "If prices stayed the same would I buy more/less of the product?"
- the answer is yes if, for example, an alternative good gets cheaper/more expensive
- if you find your self saying "because prices changed demand changes" just stop. it is correct that a buyer will buy more/less but that is just the law of demand(movement along the curve) not a change in demand (a change of the curve itself)
- External legislation: prices may change when/if the government legislates minimum/maximum prices
- A shortage or surplus can signal that prices aren't where they ought to be and can tell a supplier that they need to produce more/less and raise/lower prices to cover their marginal cost of producing the next unit. This is like the SUBARU example. Increased prices can actually be good because they encourage suppliers to provide more of the product you desire.
- ******more after next class*****
- Even when price controls don't seem to effect total surplus (concert ticket examples) the surplus will depend on how we allocate the resource. What if we use lines? what if we use lotteries? do either have additional costs that wouldn't be incurred if we allowed prices to increase? Do these different systems of allocation potentially result in different people getting the tickets?