Post Lesson 8/Pre Lesson 9

I really enjoyed class yesterday it was a lot of fun. I'd like to know what you all thought of it. I gave you all a check thought you all did seem to struggle through how to model the information you had been given. I was happy to see you all disagree with the idea that we should hold prices down after a disaster but I worry that perhaps that was either due to group think or merely because you think that's what I wanted to hear....

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.
• If the above is true it should be true for any situation. Messing with prices (lowering them) is not the right way to get goods (that are perhaps desperately needed) to the area that needs them. Despite the rightful desire to care for the poor, failing to encourage business by denying them the incentives (higher prices) to move products to their best use (area after hurricane) will only lead to further shortages and other issues.
• 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?

For next time bring your quiz from before and read BE 20, 30-38, and 118-125. In your journal, respond to this statement: "We ought to cap the amount of profits any company can earn. Beyond X billions per quarter we should claim that amount and distribute the money to small struggling businesses or people."