The Role of Prices | Cash Course: Economics | PragerU Kids

hey cash course fans before we start the show remember that you can get hundreds of free educational videos for all ages at pregn kids.com subscribe today and never miss an episode in an economy there are producers of goods like coffee roers and producers of services like haircuts then there are consumers who buy coffee beans or use the hair stylist but how do producers and consumers coordinate the exchange of these goods and services the answer is prices whether $1 or 1 ounce of gold prices are a mutually understood unit of value they communicate to Consumers what payment producers require for their goods or services and to producers what consumers are willing and able to pay without prices both would be left guessing about what each other values let's take that cup of coffee you're buying in order to come up with a value that would satisfy the producer one would have to know the time resources and energy spent to produce it and how much they expect to profit as for the producer one would have to know what each customer values in order to come up with a value they're willing to pay as well as what they can afford how would I know that exactly everyone's knowledge is limited so prices are the most efficient way for producer and consumer to communicate what's required for a specific exchange while you may be interested in knowing the cost of each step from Bean to cup all you really need and want to know is that the coffee shop requires $3 from you for the coffee the coffee shop owner will then learn quickly whether customers value what their offering and you will learn quickly how much you value what's being offered this leads to what has always been true in any economy at anytime consumers desire to spend as little as possible for a service or good and producers desire to charge as much as possible the intersection between these two competing forces is called the equilibrium price which is the price where everything produced in a given time period will be purchased so how do you reach that price in a free market prices are determined by the interplay between the quantity supplied and the quantity demanded let's illustrate this using a coffee shop suppose it can only produce 100 cups a day with each coffee priced at $3 this is the quantity supplied let's then say that exactly 100 customers purchase all 100 cups at $3 this is the quanti demanded since the number of Cups supplied is the same as the cups demanded that means $3 is the equilibrium price but prices rarely stay where they are and are bound to change with changes in Supply or demand for example news broke that coffee is bad for you this negative news reduces demand so now only 80 cups are selling at $3 there's more Supply than there is demand also called a surplus in order to clear the Surplus which left unsold is wasted time and energy you could reduce the price to $2 each since lower prices create an incentive to buy the demand from customers could rebound resulting in more cups being sold and reducing the Surplus on the other hand news broke that actually coffee's great for you this positive news increases demand and now there are more customers than there is Supply this is called a shortage in order to avoid selling out of everything you'll need to increase the price higher prices create a disincentive so demand from customers could fall and reduce the shortage in both cases whatever price clears the supply with no excess Surplus or shortage is now the price customers are willing to pay but the movement of prices has effects beyond the individual supply and demand with a specific business for example say news broke as you can see Jan coffee prices continue to rise that's a signal that demand remains strong and it will encourage other producers to also sell coffee this would also increase the demand for other ingredients like milk and sugar The increased demand could increase the prices of those ingredients for everyone who uses them like Bakers who in turn might have to raise the prices for their bread and pastries on the other hand if as you can see coffee prices are dropping Like a Rock oh that's a signal that there's way too much Supply which could lead businesses to reduce coffee production or stop selling it entirely buy this interplay between supply and demand affects the price of basically every product or service whether it's gasoline beef or haircuts and helps allocate scarce resources to their most productive uses in some economies where there's direct government intervention in prices natural price movements can be distorted this often leads to a chronic Surplus in Goods where there isn't enough demand or a shortage of goods where there isn't enough Supply but that's another episode prices especially High ones might feel arbitrary or like a business is just trying to rip you off but in a free market that price is a delicate balance based on many factors including Supply demand what consumers value and what producers can offer prices are important signals that reflect everyone's interests allowed to function properly they help help small and large economies allocate the resources and stay efficient coffee prices are on the rise oh wait no they are dropping coffee prices dropping soow now they're going right back up coffee watch more at prer kids.com and parents don't forget to subscribe