1. Students describe the effect of price controls on buyers and sellers
DETERMINING PRICES Ch. 6
12.2.4
Students explain how prices reflect the relative scarcity of goods and services and perform the allocative function in a market economy.
12.2.6
Students describe the effect of price controls on buyers and sellers

2. There are 2 known ways to allocate goods and services:
The Price system and Rationing.

3. ADVANTAGES OF PRICES
Prices are neutral (don’t favor buyers or sellers)
Prices are flexible (natural disasters, wars, can effect prices)
No administrative cost for prices (no individual is responsible, no salaries, pay)
Prices are familiar, and easily understood (had them all of our lives, and before)

5. RATIONING
A system where the government decides everyone’s fair share. (Done usually when resources are scarce)
Rationing coupons are issued, which entitles you to receive a limited amount of a product. (gas, milk, bread, meat, etc.) [Communism/Socialism]
Rationing was used during both World Wars, the 1970’s and 2012 Hurricane Sandy gas shortages.

7. DISADVANTAGE OF RATIONING
Fairness - everyone feels their share is too small.
High administrative costs (printing coupons, salaries for distributors, counterfeiting)
Diminished incentive to work (why work harder? Get the same) [Communism/Socialism criticism]

8. PROBLEM WITH DETERMINING PRICES
Consumers demand products at low prices, but sellers want to sell products at high prices…this causes a problem for the seller when determining the price for a product.

9. If the seller issues a price too high, this will cause a surplus – supply exceeds demand. When there is a surplus, sellers try to get rid of the product and make some money back by: 1. Having sales, 2. Offer rebates- discounts off original price.
If the seller issues a price too low, this will cause a shortage – demand exceeds supply. This is not good business!
The sellers’ most profitable price would be at market equilibrium – demand and supply are equal. As prices get closer to the market equilibrium price, there will be less shortage and or surplus. MQ happens where the demand and supply curves intersect.

11. PRICE CONTROLS
Price ceilings- maximum legal price that can be charged for a product. (Favors consumers, but causes shortages!)
Price floors – lowest legal price that can be paid for a good or service. (Favors sellers, they do not have to lower prices beyond that point.)
Minimum wage – lowest legal wage that can be paid to workers, is a price floor, but it causes job shortages. Why? (Think about employers)