6.1 I. Advantages of Prices A. Prices are neutral because they do not favor the buyer or the seller.  Prices are the result of competition  Prices are the result of competition  Prices answer the three basic economic questions: What, How, and For Whom  Prices answer the three basic economic questions: What, How, and For Whom

B. Prices are flexible, allowing for the “shocks” of unforeseen events and changes in the market C. Prices have no administration costs D. Prices are familiar and easily understood

II. Allocations Without Prices A. Political connections or some other allocation B. Rationing, leads to the question of fairness * Rationing leads to high administrative cost * Rationing leads to fewer incentives to work and produce

A. Prices comprise a system that helps buyers and sellers allocate resources between markets, linking all markets in the economy A. Prices comprise a system that helps buyers and sellers allocate resources between markets, linking all markets in the economy B. High prices = producers to produce more and buyers to buy less B. High prices = producers to produce more and buyers to buy less C.Low prices = producers to produce less and buyers to buy more

A. Together, demand and supply make a complete picture of the market B. Price adjustments help a competitive market reach market equilibrium, with fairly equal supply and demand

Surplusessupply exceeds C. Surpluses occur when supply exceeds demand demand Shortages demand exceeds D. Shortages occur when demand exceeds supply supply

A. A change in price is normally the result of a change in supply, a change in demand, or both B. Even small changes in an inelastic supply can create big changes in price C. Elastic supply and demand help keep prices from changing dramatically

III. The Competitive Price Theory A. The theory of competitive pricing represents a set of ideal conditions and outcomes; outcomes; it serves as a model to measure market performance B. In theory, a competitive market allocates resources efficiently

C.To be competitive, sellers are forced to lower prices, which makes them find ways to keep their costs down D. Competition among buyers keeps prices from falling too far

What are the broad social and economic goals?

I. Distorting Market Outcomes A. Achieving equity and security usually distort market requires policies that distort market outcomes. outcomes. A. Achieving equity and security usually distort market requires policies that distort market outcomes. outcomes. B. One way to achieve these goals is to set “socially desirable” prices, which interferes (rent control, with the pricing system (rent control, minimum wage) minimum wage)  Prices are not allowed to adjust to their equilibrium levels equilibrium levels  Prices are not allowed to adjust to their equilibrium levels equilibrium levels

C.Price ceiling = maximum legal price that can be charged for a product * Setting price ceilings affects the allocation of resources 

D. Price floors are set to ensure that prices do not drop too low *Minimum wage is an example of a price floor ___________________ 

In some cases the government intervenes in a market to prevent the laws of supply and demand from determining price. For example, to help support dairy farmers, the a price floor, a minimum allowable price government might establish a price floor, a minimum allowable price for milk. Because the price is kept artificially high, farmers will increase the supply they are willing to produce, even though demand is not increasing This will lead to a SURPLUSThis will lead to a SURPLUS For example, to help support dairy farmers, the a price floor, a minimum allowable price government might establish a price floor, a minimum allowable price for milk. Because the price is kept artificially high, farmers will increase the supply they are willing to produce, even though demand is not increasing This will lead to a SURPLUSThis will lead to a SURPLUS

Another example of a price floor is the establishment of minimum wage When minimum wage goes up, the demand for labor goes down, leading to a surplus of labor, and an increase in unemployment When minimum wage goes up, the demand for labor goes down, leading to a surplus of labor, and an increase in unemployment

In other markets, the government might establish a price ceiling, the highest price that can be charged for a particular good or service In other markets, the government might establish a price ceiling, the highest price that can be charged for a particular good or service A good example of a price ceiling is rent-controlled apartments. When rents are kept artificially low, many landlords will decide that it is not worthwhile to rent out apartments. As a result, the supply of apartments will decline, leading to a shortage, price ceilings lead to shortagesIn general, price ceilings lead to shortages A good example of a price ceiling is rent-controlled apartments. When rents are kept artificially low, many landlords will decide that it is not worthwhile to rent out apartments. As a result, the supply of apartments will decline, leading to a shortage, price ceilings lead to shortagesIn general, price ceilings lead to shortages

II. Agricultural Price Supports to stabilize agricultural prices A. Loan Supports … makes use of target price 1. Government loan support was offered in the 1930s 2. The CCC loan program led to food surpluses 3. Government issued non-recourse loans

B.Deficiency Payments; check sent to producers that make up the difference between the actual market price and the target price  The CCC switched to deficiency payments, which prevented the government from holding surplus food and had farmers sell their crops on the open market.  The CCC switched to deficiency payments, which prevented the government from holding surplus food and had farmers sell their crops on the open market.

C.Reforming Price Supports – goal to make agricultural output responsive to market forces , Congress passed FAIR—Federal Agricultural Improvement and Reform Act 2. Cash payments replaced price supports and deficiency payments 3. The payments ended up costing as much