Notebook # 15 - Economics 6-1 Price as signals

Economics 6-1 Prices as signals ESSENTIAL QUESTION: Why are prices like signals in a market economy? How do producers and consumers react to prices?

Economics 6-1 Prices as signals GPS STANDARD: SSEMI2- The student will explain how…prices and profits work to determine production and distribution in a market economy.

Economics 6-1 Price as signals It turns out something as simple as a price–the monetary value of a product as established by supply and demand–is a signal that helps us make our economic decisions.

Economics 6-1 Price as signals Prices communicate information and provide incentives to buyers and sellers. make our economic decisions. High prices are signals for producers to produce more and for buyers to buy less. Low prices are signals for producers to produce less and for buyers to buy more.

Economics 6-1 Advantages of Prices Prices are neutral because they do not favor the buyer or the consumer. They are the result of competition. Prices are flexible, allowing for the “shocks” of unforeseen events and changes in the market. Prices have no administration costs. Prices are familiar and easily understood.

Economics 6-1 Advantages of Prices Prices are neutral because they do not favor the buyer or the consumer. They are the result of competition. Prices are flexible, allowing for the “shocks” of unforeseen events and changes in the market. Prices have no administration costs. Prices are familiar and easily understood.

Economics 6-1 Allocations Without Prices Rationing, or the system where the government decides everyone’s “fair” share, leads to the question of fairness. Rationing leads to high administrative costs. Rationing leads to fewer incentives to work and produce.

Economics 6-1 During the oil crisis in the early 1970s, the proposed gas rationing program raised serious differences of opinion among Americans. Some people argued that every adult American should get the same number of gas rationing coupons. Others argued that owners of newer, more fuel-efficient cars would not need as many coupons as owners of older, gas-guzzling models.

Economics 6-1 Those who lived in western states believed they should receive more coupons than Easterners because they traveled longer distances. Some people called for every car owner to receive a certain number of coupons; others said this plan discriminated against families with several drivers who shared one car.

Economics 6-1 Prices as a System Together, prices comprise a system that helps buyers and sellers allocate resources between markets, linking all markets in the economy.