The Role of Prices in the Free Market

Prices in the Free Market In the free market prices are a tool for distributing They are nearly always the most Prices help move land, labor and capital Prices move finished goods into the

The Advantages of Prices Prices provide a language for buyers and sellers Price as incentive: –Buyers and sellers look at prices to –Prices communicate to both buyers and sellers –Producers respond not only to the demand, but also to the

The Advantages of Prices Prices as signals –High price of a good  tells producers that if the demand for a good at a –Low price of a good  tells producers that the good is being overproduced –High price of a good  tells consumers to think –Low price of a good  tells consumers to buy

The Advantages of Prices Flexibility –Prices are much more flexible than output levels –Prices can easily be increased to solve a problem of excess demand and they can be Supply shock  a sudden –Creates a problem of excess demand because suppliers –Resolved by –The people who have enough money remain in the market at the new price and

A Wide Choice of Goods Prices give suppliers a way to allow Prices provide an easy way for you to Prices allow producers to target the audience they want with the Black market  a market

Efficient Resource Allocation All the advantages of a free market allow This means that land, labor, and capital will be used for A market system, with its freely changing prices, ensures that resources go to A price-based system ensures that resource use will adjust to

Market Problems Problem 1  imperfect competition: can affect prices, and higher prices can affect consumer decisions –If only one producer is selling the good, this producer Problem 2  spillover costs: costs of production that affect people –Since producers do not have to pay spillover costs, their total costs seem low, and they will produce more than equilibrium quantity of a good.  Problem 3  imperfect information: if you don’t have enough information about a product,