1. PRICES AS SIGNALS Ch. 6-1 Pg. 136-141 MAIN IDEA- Competitive markets are important to capitalism

2. ADVANTAGES OF PRICES PRICES ACT AS A SIGNAL NEUTRAL- Favors neither seller or buyer. –Competition b/w buyers and sellers Prices are flexible –Early personal computers Prices have no cost of administration. Prices are easily understood.

3. ALLOCATIONS WITHOUT PRICES Allocation without prices used in command economies RATIONING- Everyone gets a “fair share”. Used with a Ration Coupon. PROBLEM: Everyone thinks their share is too small. –Black Market in Ration Coupons

4. ALLOCATION PROBLEMS (CONT’D) HIGH ADMINISTRATIVE COST- Everything has to be paid for and some ration coupons will be stolen. DIMINISHING INCENTIVE- Has a negative impact on peoples’ desire to work.

5. PRICES AS A SYSTEM Prices help allocate resources between markets. (Smaller autos)

6. THE PRICE SYSTEM AT WORK, 6-2, Pg. 142-148 PRICE ADJUSTMENT PROCESS AN ECONOMIC MODEL- Consists of a schedule with demand, supply, and surplus shortage. A graph with a demand curve and a supply curve.

7. Supply and Demand Schedules For Milk What do you think the price of milk will be?

8. Supply, Demand and Equilibrium

9. An Example of Supply and Demand

10. 6-2, CONT’D MARKET EQUILIBRIUM- Where prices are stable and the quantity of goods/services demanded equal the quantity supplied.