economics supplemental notes for chapter 5 prices

Economics

Supplemental Notes for Chapter 5

PRICES

Benefits of the Price System

• Information• Incentives• Choice• Efficiency• Flexibility

Limitations of the Price System

• Also called MARKET FAILURES– Fails to account for

some costs and cannot distribute them appropriately.

Market Failures

• Externalities– Negative

– Positive

• Public Goods• Instability

Questions

• What is market equilibrium?

• How does the price system handle product surpluses? Shortages?

• How do shifts in demand and supply affect market equilibrium?

Setting Prices

• Price Ceilings• Price Floors

Consequences of Setting Prices

• Ceilings / Floors can prevent the market from reaching equilibrium.

• EXAMPLE: Rental property in NYC.

Rationing

• Sometimes supply of a good is so low that a government rations to keep some supply.

• RATIONING: The govt. or other institution decides how to distribute a product.

Rationing doesn’t happen often in free enterprise

• WWII – Rationing tires, gas, meat, butter, sugar, coffee.

• TODAY: College sporting events. Alums and current students get priority in seating.

Consequences of Rationing

• Unfair• Expensive• Creates black markets

(underground economies)