Transcript ECONOMICS

ECONOMICS
CHAPTER 5, SECTION 1THE PRICE SYSTEM
I. The Price System
• A. The price system allows producers
and consumers to communicate to each
other, balance supply and demand by
compromising on production levels, and
is relied upon by consumers and
producers to answer the basic economic
questions.
• B. There are benefits and limitations to
the price system.
II. Benefits
• A. Information-Producers gather
information about the cost of resources
to produce their goods and services.
• Consumers gather information about
prices to make informed purchasing
decisions.
II. Benefits
• B. Incentives-High prices encourage
producers to produce more goods and
services.
• Low prices encourage consumers to
purchase more goods and services.
II. Benefits
• C. Choice-High incentives encourage
producers to increase the variety of
goods and services they are producing.
• Consumers benefit by having a wide
selection of goods and services from
which to choose.
II. Benefits
• D. Efficiency-When producers know
which goods and services consumers
demand, they do not waste resources
producing unwanted goods and services.
• Prices help consumers make decisions by
eliminating options not available to
them.
II. Benefits
• E. Flexibility-Natural disasters, trends,
the weather, etc. can create demand
for goods and services (very quickly, at
times). Producers can raise prices to
lower demand for goods and services or
producers cannot raise prices and cause
a shortage of goods and services
III. Limitations (market failures)
• A. Positive Externalities-This is when
someone who does not buy or sell a good
or service benefits from it. This is a
failure because the price system fails
to assign the entire cost of production
to all those who benefit.
III. Limitations (market failures)
• B. Negative Externalities-This is when
someone who does not buy or sell a good
or service bears part of the cost of it.
This is a failure because the price
system fails to assign the entire cost of
production to only the producers and
consumers of the product.
III. Limitations (market failures)
• C. Public Goods-These are goods and
services which are consumed (or may be
consumed) by all members of a group.
These are market failures because the
price system fails to assign a cost of
using the good/service to all consumers.
III. Limitations (market failures)
• D. Instability-The flexibility of the
price system can cause prices to swing
drastically high or drastically low. This
is a failure because it causes producers
and consumers to be unable to rely on
stable prices when making decisions.