Microeconomics Chapter 7: The Price System- Signals, Speculation, and Prediction

-A price is a signal wrapped in an incentive.
-To bring just one product to your table requires the cooperative efforts of millions.
-Market is the original Web, and its more dense, interconnected, and alive with intelligence than its computer analog.

-Higher energy costs increase the cost fo producing most products, including candy bars.
-Brazil increased ethanol production with a oil price increase, and increased the price of sugar by slowing down production.
-An increased price of gasoline leads to an increase in price of other oil alternatives since most of the crude oil is going to gasoline production.

-to arrange our limited resources to satisfy as many of our wants as possible.
-we want to shift oil out of low-valued uses where we can do without or where good substitutes for oil exist, so that we can keep supplying oil for high-valued uses, where oil has few subs.

-No one really knows all the uses of oil and which uses are high valued or low valued.
-The central planning approach fails because of problems of information and incentives.

In a free market the price of a commodity is equal to the value fo the commodity in its next highest value or use.
-Above the market price are the uses of an idem in whose value is greater than the price; in a free market these demands will be satisfied.
-Below the price are the uses of an idem whose value is less than the price; in a free market these are the unsatisfied demands.

-Prices are incentives, prices are signals, prices are predictions.
-When the price of oil increases all consumers are encouraged to economize and producers are encouraged to look for subs
-High price of ice in a hurricane devastated area signals a profit opt for ice suppliers.
-In a successful economy there will be many unsuccessful firms.

Is the attempt to profit from future prices.
-Speculators raise prices today but lower them for the future.

-contracts to buy or sell at a specific date in the future at a price specified today.

the cash value of the underlying asset (rather than the asset itself) is delivered to satisfy the contract.
Ex. Alex has agreed to give Tyler 1,000 barrels of oil, which are currently worth $82,000, for a price of $50,000. Instead of Tyler accepting the oil, Alex gives Tyler the cash difference.

Future prices for oil, currencies, and many commodities can be found in a newspaper or online, so anyone who wants to forecast events in the Middle East can benefit form reading price signals.
-The future price of oil is a noisy signal of war in the Middle East.

a speculative market designed so that prices can be interpreted as probabilities and used to make predictions.
-Ex. a share would pay $1 if Clinton won the election. If Clinton had a 20% chance of winning you would invest 20 cents.
-Events with a 40% prediction happen 40 percent of the time.
-The Hollywood stock exchange would be a good predictor of future box office revenues.

-Markets are linked geographically, through times and across different goods.
-The market acts like a giant computer to arrange our limited resources to satisfy as many of our wants as possible.
-Price signals incentivize everyone to take appropriate actions to respond to scarcity and changing circumstances.