1. Chap. 6 Sect. 1 Prices as Signals
Goals:
List and explain the benefits of a price based market.
Illustrate how a price-based market leads to more choices
and greater efficiency.
Analyze the problems that can occur without price-based
markets.
Explain the two roles of prices within the price system.

2. 1) Provide a language for buyers and sellers to communicate
Prices as a System
Sam wants to buy his sister a sweater for her birthday –
Cotton sweaters in the mall $20-$50 , Cashmere sweaters $110 - $350
He chooses a $25 cotton sweater based on his budget and sister’s taste
Finds an almost identical sweater made out of acrylic yarn online for $20 with free shipping – buys it and returns the first one
2 Roles of Prices:
1) Provide a language for buyers and sellers to communicate
2) Distribute resources and goods through the economy
Price based systems ensure that resources go towards the
G & S that people value most, resources are not wasted on unwanted products

3. Distribution without Prices
Rationing – dividing up goods based on criteria other than price, (need, equal #’s for all, etc)
Rationing requires time and $ for organization & enforcement
Rationing leads to bidding wars where the wealthy ultimately win, or to Black Markets where goods are bought and sold illegally at highly inflated prices
Non-Price Based Systems have the following problems:
Fairness
Expensive
Diminishing Incentives

4. 4 Advantages of Prices
-Neutral ”Free” Familiar Flexibility
Prices are Neutral- Prices can encourage behavior from buyers and sellers but do not favor one over the other
-Prices result from competition and are a compromise between buyers and sellers- better competition = efficient pricing
Prices are “Free”– Price Changes do not require government intervention or administrative costs, they happen quickly & easily without having someone in charge

5. Advantages of Prices cont.
Prices are Familiar- People understand how prices work and how to use them without special training
Prices are Flexible – In many cases it is easier to change prices than to change levels of production
Surpluses and shortages can be fixed faster with a price change than by lowering or increasing production of a good
Raising prices will lower demand and bring new equilibrium quickly

6. Prices and Choice Market Based economies have lots of choices
Thanks in part to price system
Remember Sam and his sweater choices:
Different prices reflect different levels of quality and materials
Sellers can target different buyers by charging different prices (cashmere vs. cotton)
Command Economies= extremely limited price ranges but the result is very limited choice, use rationing to control the distribution of goods – due to shortages
U.S. gov’t used rations in WWII because of shortages in an effort to keep prices down – but most of the public was unhappy because of limited choice

7. Prices as Signals
Producers : Green Light = High Prices - tell producers that a product is in demand encourages them to make more Red light = Low Prices – tell producers that there is a surplus and they should cut back production Buyers : Green Light = Low Prices – tell buyers that it is a bargain, they will tend to buy more Red light = High Prices – tell buyers to really consider the purchase and costs – tend to buy less

8. Goals: List and explain the benefits of a price based market.
Illustrate how a price-based market leads to more choices
and greater efficiency.
Analyze the problems that can occur without price-based
markets.
Explain the two roles of prices within the price system.