Transcript Chapter 6 Prices and Decision Making

Chapter 6
Prices and Decision Making
Section 1
Prices as Signals
Page 142
Price
• The monetary value of a product as
established by supply and demand – it is a
signal that helps us make economic decisions
• High Prices signal buyers to buy less and
producers to produce more
• Low Prices signal buyers to buy more and
producers to produce less.
Advantages of Prices
• Prices help produces and consumers decide the
three basic questions of WHAT, HOW, and FOR
WHOM to produce.
• In a competitive market economy prices are
neutral because they favor neither the producer
not the consumer
• Prices are flexible allowing sellers and buyers to
adjust their production and consumption
• Prices have no cost of administration – they tend
to find their own prices without outside help or
interference
Allocation Without Prices
• Rationing – a system under which a
government agency decides everyone’s “fair”
share.
• Ration coupon ticket or a receipt that entitles
the holder to obtain a certain amount of a
product
Problems with Rationing
• Almost everyone feels that his or her share is
too small
• Cost of rationing - Someone must pay the
salaries and the printing and distribution
costs of coupons (fraud)
• Negative impact on the incentive to produce
Prices as a System
• The price system does more than help
individuals make decisions – they serve as
signals that help allocate resources between
markets
– The Price of Oil v SUV’s and rebates
– Prices as an information network linking all
markets in the economy.