Rationing & Black Market Economies

The Problem of Scarcity Scarcity - Limited quantities of resources to meet unlimited wants. If goods are scarce, they must be rationed. Rationing is a system of allocating scarce goods and services according to certain criteria. Ex. Physical prowess, public esteem, age, need, merit, willingness to pay money, etc.

Competition and Price Competition is the natural result of scarcity. Individuals striving to meet the criteria used to ration goods. Price - society rationing on the basis of a willingness to pay money. Individuals will work to earn money and those that are able and willing to pay the price will receive the good.

Price as a Rationing Device When goods are in short supply, consumers compete against each other to obtain the good. In a market economies the result of this competition is an increase in price; Price serves as an important rationing device in market economies and a signal for economizing. What happens when price controls are implemented?

Other Rationing Methods When prices are fixed, an economy must develop another way to ration scarce resources: Need First come, first served Lottery, equal share for all Merit Can you think of any others??

What is a black market? Black Markets - A market consisting of all commerce on which applicable taxes or regulations are avoided. A black market can consist of either… Legal goods sold at illegal prices Illegal goods Black markets often develop when price controls are implemented

How do Price Controls Lead to Black Markets? Effects of Price Ceilings: Demand by consumers will increase; Seller’s profits decrease; In order to maximize profits, sellers will reduce supply; Shortages result; Consumers who are willing and able to pay a higher price for the good will find a way to obtain it on the black market.

Black Markets cont… How do black markets affect the supply of goods? Consumers who are willing/able to pay will move into the black market; Demand for the good will increase along with the black market price; Suppliers will divert more of the product onto the black market in order to make more money; Shortages will be exacerbated in the legal market.