PricesPrices

Prices in the Free Prices in the Free MarketMarket Help move land, labor, and capital Help move land, labor, and capital

into the hands of producers and into the hands of producers and finished goods into the hands of finished goods into the hands of consumers.consumers.

Can vary for many reasons.Can vary for many reasons.– Help consumers decide what to buy.Help consumers decide what to buy.– ExampleExample

Advantages of PricesAdvantages of Prices

IncentivesIncentives– Can be signals to producers or Can be signals to producers or

consumers to adjust.consumers to adjust.– Can tell people if goods are in short Can tell people if goods are in short

supply or easily available.supply or easily available.– Traffic Light ExampleTraffic Light Example

ProducersProducers ConsumersConsumers

Green – High Green – High PricePrice

Green – Low Green – Low PricePrice

Advantages of Prices Advantages of Prices (Cont.)(Cont.)

FlexibilityFlexibility– Prices can be adjusted when a Prices can be adjusted when a

supply or demand shift changes supply or demand shift changes equilibrium.equilibrium. This is because prices are easier to This is because prices are easier to

adjust than output levels.adjust than output levels. Supply Shock or Shortage.Supply Shock or Shortage.

– Increasing supply can be time consuming Increasing supply can be time consuming and difficult.and difficult.

– Rationing is expensive and hard to organize.Rationing is expensive and hard to organize.– Raising prices solves this problem.Raising prices solves this problem.

Advantages of Prices Advantages of Prices (Cont.)(Cont.)

Price System is FreePrice System is Free– Unlike central planning.Unlike central planning.– Everyone is familiar with them which Everyone is familiar with them which

allows goods to flow through an allows goods to flow through an economy without a central plan.economy without a central plan.

– Allows for there to be a wide variety Allows for there to be a wide variety of choices available to the population.of choices available to the population.

– Price system allows resources to Price system allows resources to be allocated efficiently.be allocated efficiently.

Rationing and Rationing and ShortagesShortages Rationing is expensive and difficult to Rationing is expensive and difficult to

organize but has been used by the U.S. organize but has been used by the U.S. before.before.– WWII – Chosen because a price based WWII – Chosen because a price based

system may have put necessities beyond system may have put necessities beyond the means of many Americans.the means of many Americans.

– Created a “Black Market”Created a “Black Market” When consumers pay more for a good that When consumers pay more for a good that

rationing would make otherwise unavailable.rationing would make otherwise unavailable. Illegal and largely discouraged by governments.Illegal and largely discouraged by governments.

Prices and the Profit Prices and the Profit IncentiveIncentive

Adam Smith “Wealth of Nations”Adam Smith “Wealth of Nations”– Producers do not provide goods out Producers do not provide goods out

of the kindness of their hearts, they of the kindness of their hearts, they do it because they want to make a do it because they want to make a profit.profit.

Market ProblemsMarket Problems

Imperfect CompetitionImperfect Competition– If only a few firms are selling a product If only a few firms are selling a product

there might not be enough competition there might not be enough competition among sellers to lower the market price among sellers to lower the market price down to the cost of production.down to the cost of production.

ExternalitiesExternalities Imperfect InformationImperfect Information

– If people do not have enough information If people do not have enough information about a product they may not make about a product they may not make informed choices that are beneficial to informed choices that are beneficial to them.them.

AssignmentAssignment

6.3 Key Terms6.3 Key Terms Pg. 144Pg. 144

– 1-4 & 61-4 & 6