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 doesnt 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)