1. P R I C E S The Role of Prices Chapter 6 Section 3

2. P R I C E S Price are a key element of Equilibrium Price Changes can move markets toward equilibrium and solve problems of a surplus or a shortage.

3. P R I C E S In a free market, prices are the tool for distributing goods and resources throughout the economy. Prices are nearly always the most efficient way to allocate or distribute resources. The alternative method for distributing goods and resources, mainly central planning, is not nearly as efficient as a market system.

4. P R I C E S Prices serve a vital role in a free market. Prices move land, labor, and capital into the hands of producers and into the hands of buyers.

5. P R I C E S Advantages of Prices… Prices provide a language for buyers and sellers. Without prices???? We would have a barter system in place A bike (that costs $ 150.00 in US dollars}… may cost 2 goats, 3 chickens, and a rabbit down at the Goat Town Hardware.

6. P R I C E S Without prices there would no consistent and accurate way to measure the demand for a product.

7. P R I C E S The Advantages of Prices… Neutral Flexible Freedom of Choice No Administrative Cost Efficient

8. P R I C E S 1. Neutral Prices in a free market economy are neutral They favor neither the producer or the seller They are a result of competition between buyers and sellers The more competitive the market, the more efficient the allocation process

9. P R I C E S 2. Flexible * Unforeseen events such as weather, strikes, natural disasters, and events affect the prices for many items. * Buyers and Sellers react to the new level of prices and adjust their consumption and production. * System is able to absorb the unexpected shocks in the economy.

10. P R I C E S 3. Freedom of Choice The price system provides maximum freedom of choice for everyone. A wide variety of products to choose from. A wide range of prices on products as well. If the price is too high, people find a substitute.

11. P R I C E S 3. Freedom of Choice * In a command economy – Cuba, North Korea, etc. people face limited choices in products. The government planners allocate both resources and products.

12. P R I C E S 4. No Administrative Cost Prices have no cost of administration Competitive markets tend to find their own prices without outside help or interference. No bureaucrats need to be hired, no committees formed, no laws passed, or other decisions made

13. P R I C E S 5. Efficient Prices are efficient because they are easily understood by everyone. People can make decisions quickly and efficiently with a minimum of time and effort.

14. P R I C E S One of the benefits of a market-based economy is the diversity of goods and services consumers can buy.

15. P R I C E S Rationing/Shortages: A system of allocating goods and services U using criteria other than price. US used rationing during World War II Gave out coupons to buy goods. Based on a monthly consumption that was fair in the eyes of the government.

16. P R I C E S Created tremendous shortages at home. Most of the goods produced went to the war effort to help the troops. Gov’t. limited choices of goods, etc.

17. P R I C E S Black Market: A market in which goods are sold illegally. Many businesses sold goods illegally to customers that they may have known or were good friends. Black markets allow consumers to pay more so they can buy a good when rationing makes it otherwise unavailable.

18. P R I C E S All of the advantages of a free market allow prices to allocate resources efficiently. Efficient resource allocation means that economic resources – land, labor, and capital – will be used for their most valuable purposes.

19. P R I C E S A market system, with its freely changing prices, ensures that resources go to the uses that consumers value most highly. A price-based system also ensures that resource use will adjust to the changing demands of consumers.

20. P R I C E S The Wealth of Nations by Adam Smith Published in 1776. Smith explained that businesses prosper by finding out what people want and then providing it. This has proved to be a more efficient system than any other in the world.

21. P R I C E S The only other problems that may arise in a market economy is that of 1) imperfect competition. If only a few firms are selling a product, there might not be enough competition among sellers to lower the market price down to the cost of production. With only one producer, he charges a higher price than we would see in a market with several businesses.

22. P R I C E S 2. Spillover Costs Include costs of production, such as air & water pollution, that is “spill over” onto people who have no control over how much of a good is produced. 3. Imperfect information If buyers and sellers do not have enough information to make informed choices about a product, they may not make the choice that is best for them.