Prices and Monopolies

Test #3

Price…

• Price- the monetary value of a product established by supply and demand.

• Information signal

• It is a mode of communication

Prices…

• Neutral• Results• Flexible• Free• Regulatory• Convenient

Prices…

• Neutral:– They do not favor the consumer or producer– We both team together to set the price– 50/50- producers will only set the price at a point

where you will be willing to pay

Prices…

• Are Results:– Competition between producers (and in some

cases consumers) is the foundation of price setting.

– Not an arbitrary number– Process to determine willingness

Prices…

• Flexible:– Wants are usually fleeting passions– Producers must make their money as fast as they

can– Both sides of the coin are fickle

Prices…

• Free– No outside source required to set price– No cost to producer to list a price– No cost to consumer to know a price

Prices…

• Regulatory– In the economy you vote with your wallet– Raises and lowering of price is dependent upon

demand/supply relationship– Ability, willingness and desire– Outside forces just make it harder to interpret

Prices…

• Convenient– Fixed prices make monetary exchange easier– No worry about best deal or fairness– Ex. Car dealership• Reputation of used car salesman?• Do we look forward to going to them?• Dealership vs. Grocery Store

Prices…

• Without them…– No one feels like they get their fair share• Rationing- government allocates resources • Ration coupons- represents portions of your share

– Costs are high– Incentives are low– No information/signal

Prices…

• ___________– Maximum legal price that can be charged for a product– Creates huge/permanent shortages in supply– False sense of market security– Destroys ability to be flexible.

• ___________– Lowest legal price that can be charged for a good or

service– Leaves big surpluses in supply– Ex. Minimum wage (does minimum wage really work?)

Terms:

• _______________- – Prices are relatively stable, and QS is equal to QD

• ________________- – QS is greater than QD

• ________________-– QD is greater than QS

• _______________-– Market is “Cleared”- no shortage and no surplus at

the end of trading period.

Competition

• _________________: “allow them to do”– Government should be restricted to:

• Protecting private property• Enforcing contracts• Settling disputes• Protecting national business from foreign competition.

• __________________:– Individuals or small groups that run a market– Change the competitive nature of business

• Forced the creation of unions

• __________________:– Most products in the US– Add small “unique” characteristics to similar products to be different.

Monopoly• _________________:

– When cost minimization naturally leads to a single firm producing a certain product

• _________________:– When there is an absence of other sellers in a geographic area.

• _________________:– Based on ownership or control of certain processes or

technologies• Ex. Patenting a new invention.

• _________________:– Government provided or approved– Usually when the private sector cannot adequately or properly

provide a service– Meant to prevent corruption/collusion. – Softens the blow in America, we traditionally hate monopolies

even though they are needed sometimes.

Inadequacies…

• _______________:– Inefficient resource allocation– Prices and Output• Prices rise, quality diminishes

– Power• Ability to speak into government because of influence

– Failure of Demand side• Monopolies need resources to produce goods• Would you provide those goods to a market with only

one customer?

Inadequacies…

• ______________:– Only one price means only one source of info

• __________________:– One supplier (especially with jobs) means drastic

problems when companies close, or shift focus• ________________:– The bigger the company the harder it is to

change/maneuver. – Inability to change = harder impact