Section 3 Role of Prices
Why do prices play a vital role in a free market economy?
Prices help move land, labor, and capital into the hands of producers and finished goods into the hands of buyers.
How do price changes affect equilibrium?
By serving as a tool for distributing good and services.
What are the advantages of a price based system?
Prices provide a language for buyers and sellers Prices provide a language for buyers and sellers. Without prices as a standard measure of value, a seller would have to barter for goods (bid shoes or apples to purchase a sweater). Suppliers would have no consistent and accurate way to measure demand for a product.
Price as an Incentive -Buyers and sellers alike look at prices to find information on a good’s demand and supply.
Prices as Signals - The laws of supply and demand describe how people and firms respond to a change in prices. In these cases, prices are the signal that tell a consumer or producer how to adjust.
Flexibility of Prices -When a supply or demand shift changes the equilibrium in a market, prices can be increased to solve a problem of excess demand (supply shock). It can be decreased to eliminate a problem of excess supply.
What is supply shock?
It is the result of sudden shortage of a good It is the result of sudden shortage of a good. It results in excess demand because suppliers can no longer meet the needs of consumers.
Wide Choice of Goods -One of the benefits of a market based economy is the diversity of goods and services. Prices gives suppliers a way to allow consumers to choose among similar products.
What happens where there is a shortage of supply in the market?
During World War II, the military created a shortage of supplies. The U.S. government rationed and controlled the distribution of food and consumer goods. Rationing guaranteed everyone get a fair share of essential supplies without paying outrages prices that were caused by the shortage.
What type of economic system tries to insure that everyone gets a fair share of goods and supplies?
Command Economic System -It’s an economic system that do not use a price based system. The former Soviet Union (Communism) used this system to insure everyone gets a fair share of goods and supplies.
How do price changes affect equilibrium?
By serving as a tool for distributing good and services.
What is the “black market” and how does it work in the market?
Black market is used by people who conduct business without regard for government controls on price or quantity. It allows consumers to pay more so they can buy rationed or unavailable goods.