More producers in a market increases supply which leads to increased competition and a lower equilibrium price

Competitive pricing occurs when producers sell goods and services at lower prices to lure customers away from rival producers while still making a profit

Elm Street Hardware prices its snow shovels at $20

Uptown Hardware prices its snow shovels at $13◦Uptown would then have a lower profit margin per shovel but ideally it would sell more shovels at the lower price of $13

In a market economy, the price system has 4 characteristics:◦1. It is neutral: the interaction between producers and consumers determines the equilibrium price in the market.

2. It is market driven: market forces determine price of goods/services

3. It is flexible: when market conditions change, prices change too. Surpluses and shortages motivate producers to changes prices to reach equilibrium.

4. It is efficient: prices will adjust until the maximum number of goods and services are sold.

The laws of demand and supply show that consumers and producers have different attitudes toward price◦Consumers want to buy at low prices◦Producers want to sell at high prices

The price system has 2 great advantages: it provides information and motivation

◦Prices provide information by acting as signals to producers about whether or not it is a good time to enter/leave a marketRising prices and the expectation of

profits motivate producers to enter a market

Falling prices and the possibility of losses motivate them to leave a market

A shortage is a market signal that consumer demand is not being met by existing suppliers◦Producers see that as an opportunity to raise pricesHigher prices are an incentive for producers to enter a market

When more producers are motivated by higher prices to enter a market, quantity supplied increases

When prices are too high relative to consumer demand, a surplus occurs

Producers respond to a surplus by reducing prices or reducing production◦Falling prices are a signal that it is a good time for producers to leave the market

While prices are signals that are visible in the market, it is the expectation of profits or the possibility of losses that motivated producers to enter or leave a market

Prices also act as signals and incentives for consumers

Surpluses that lead to lower prices tell consumers that it is a good time to buy a particular good/service

Producers send signals to consumers in the form of advertising and store displays

High prices discourage consumers from buying a particular product◦Often high prices are a signal that it is time for a consumer to switch to a substitute good with a lower price

A high price may signal that a good is in short supply or has a higher status◦Think name brand goods

Definition: the legal maximum price that sellers may charge for a good/service◦This is a price below the equilibrium price and results in a shortage

Rent control means that despite what is going on in the market, rent prices cannot exceed a certain level◦This leads to a shortage of rental

properties ◦Often these rental properties are not

well-maintained due to the fact that the rent cannot go above a certain point

Definition: legal minimum price that buyers must pay for a good/service

Minimum wages are set below the equilibrium price to prevent the wage from becoming unprofitable

The market uses prices to allocate goods and services ◦Rationing is an example in which the government allocates goods/services using a factor other than price

Generally a rationing system uses coupons that allow each person only a certain amount of a specific good ◦The black market, the illegal buying and/or selling of a good, can be used to avoid rationing

1. A local supermarket decides to sell a premium brand of meats and cheeses in its deli department. This brand is priced $2 more per pound than the store brand. About 80% of the space in the deli display cases is devoted to the premium brand and 20% to the store brand.◦A. How did price serve as an incentive to the

supermarket?◦B. What kind of signals is the supermarket sending

to its customers with this pricing strategy?

2. The percentage of workers who were paid the minimum wage or less decreased from 6.5% in 1988 to 3% in 2002 to 2.7% in 2004. What does this trend tell you about the relationship of the minimum wage to the equilibrium wage for those kinds of work?