Prices as a System Prices help consumers and producers make decisions Tells sellers where to sell and consumers where to buy Prices serve as signals Allocate resources between markets Can impact many markets

Fixed Prices Why are prices fixed? Special interest groups influence government policies Economists believe the costs of fixed price often outweighs the benefits

Price Ceilings Price Floors Lowest legal price Ex. Minimum wage Can decrease demand Maximum legal price that can be charged Result in shortages Prices no longer allocate resources Threatens profits of supplier Positive for people who receive the good Negative for those who do not

Predicting Prices Use models to explain and predict Predict changes in supply Ex. Agriculture Factor in demand elasticity Considered with a change in supply Illustrate possible changes in demand Ex. Gold

Agricultural Price Supports Government will try to stabilize prices Use loan supports and deficiency payments in the 1930s Commodity Credit Corporation Loan Supports Put crop up as security Repay loan after selling crop, or give crop and keep loan money If unable to repay, they just forfeit the crop Non-recourse loan Creates large stockpiles of food

Agricultural Price Supports Deficiency Payments Encouraged farmers to sell on the open market CCC would make up payment differences between actual price and target price Reforming Price Supports Federal Agricultural Improvement and Reform Act – 1996 Cash payments took place of price supports and deficiency payments LDP – Loan Deficiency Payment