PRICES AS SIGNALS Ch. 6-1 Pg MAIN IDEA- Competitive markets are important to capitalism

ADVANTAGES OF PRICES PRICES ACT AS A SIGNAL NEUTRAL- Favors neither seller or buyer. –Competition b/w buyers and sellers Prices are flexible –Early personal computers Prices have no cost of administration. Prices are easily understood.

ALLOCATIONS WITHOUT PRICES Allocation without prices used in command economies RATIONING- Everyone gets a “fair share”. Used with a Ration Coupon. PROBLEM: Everyone thinks their share is too small. –Black Market in Ration Coupons

ALLOCATION PROBLEMS (CONT’D) HIGH ADMINISTRATIVE COST- Everything has to be paid for and some ration coupons will be stolen. DIMINISHING INCENTIVE- Has a negative impact on peoples’ desire to work.

PRICES AS A SYSTEM Prices help allocate resources between markets. (Smaller autos)

THE PRICE SYSTEM AT WORK, 6-2, Pg PRICE ADJUSTMENT PROCESS AN ECONOMIC MODEL- Consists of a schedule with demand, supply, and surplus shortage. A graph with a demand curve and a supply curve.

Supply and Demand Schedules For Milk What do you think the price of milk will be?

Supply, Demand and Equilibrium

An Example of Supply and Demand

6-2, CONT’D MARKET EQUILIBRIUM- Where prices are stable and the quantity of goods/services demanded equal the quantity supplied.