PRICE SYSTEM
The Price System Information Incentives Choice Efficiency Flexibility
Information
Incentives
Choice
Efficiency Prices tell producers what products people want or do not want. Prices quickly deliver information to both producers and consumers.
Flexibility Prices can be quickly adjusted based on issues with either supply or demand.
Market Failures The price system fails to account for some costs and therefore cannot distribute them appropriately.
Externalities The production of goods sometimes results in side effects that can be either good or bad for people not directly connected with either the production or consumption of the good. Negative Externalities Positive Externalities
Negative Externalities
Positive Externalities
Public Goods
Instability Because of the flexibility of the system it may become unstable at times such as when there are natural disasters or worker strikes prices may swing quickly between extremes.
Public Goods No pay, no spray: Firefighters let home burn Tennessee house in ashes after homeowner 'forgot' to pay $75 fee http://www.msnbc.msn.com/id/39516346/ns/us_news-life/t/no-pay-no-spray-firefighters-let-home-burn/
Market equilibrium
Price above equilibrium If the price exceeds the equilibrium price, a surplus occurs:
Price below equilibrium If the price is below the equilibrium a shortage occurs:
Demand rises
Demand falls
Supply rises
Supply falls
Price ceiling Price ceiling - legally mandated maximum price Purpose: keep price below the market equilibrium price Examples: rent controls price controls during wartime gas price rationing in 1970s
Price ceiling (continued)
Price floor Price floor - legally mandated minimum price Designed to maintain a price above the equilibrium level Examples: agricultural price supports minimum wage laws
Price floor (continued)
Farm Subsidies Subsidy Recipients 1 to 20 of 284 in zip code 54840 Recipients in this zip code received $8,045,913 from 1995-2006 http://farm.ewg.org/addrsearch.php?s=yup&stab=US&zip=54840&z=See+Recipients&last=&first=&stab=AL&fullname=&stab2=AL
Rationing If supply falls too low for an essential product Government may ration that product. WWII Sugar/Tires Black Markets Market where goods are sold illegally or at higher than legal prices.
OPEC Increases Oil Production
Market for SUVs
Market for Economy Cars
Housing Market 1. Easy Credit 2. 2008 3. 2010
Market for Lumber Demonstrate why the price of lumber might rise in the spring
Market for Alcohol 1. 1918 2. 1919 3. 1934
Market for Alcohol 1. 1918 2. 1919 3. 1933
Market Size Increases
New Technology Improves Production
Government Subsidizes Production
Market for Propane Winter 2014