1 Essential Question: Explain how the price system allows consumers and producers to communicate with each other and identify 5 benefits and 3 shortcomings of the price system. The Price System SECTION 1

2 What is the price system and what does it do? The system that producers/consumers use to communicate their needs and wants to each other. to tell consumers how much it costs to produce or distribute a good or service to tell producers how much consumers are willing and able to pay for a product The Price System SECTION 1

3 5 Benefits of the price system Provides information- Allows producer to know how much their resources cost and in turn, how much they should price their products for. It also can inform consumers about the relative value of different items allowing them to budget. The Price System SECTION 1

4 5 Benefits of the price system Provides incentive- Through changes in price (increase/decrease) producers and consumers can be encouraged or discouraged to play their role. Provides Choice- By having prices that could generate profits for producers, new producers are encourage to enter the market creating choices for consumers The Price System SECTION 1

5 5 Benefits of the price system Provides Efficiency- The price system allows consumers and producers to communicate efficiently. Consumers who choose not to buy products or who won’t buy it b/c the price is too high are actually helping producers. Producers will either lower the price or allocate the resources towards other products so that they are not wasted. The Price System SECTION 1

6 5 Benefits of the price system Provides Flexibility- If some unexpected change in demand or supply were to occur, it could cause chaos with consumers fighting to obtain a product that producers cannot supply enough of. By being able to change the price, Producers can influence and reduce demand until a time when they can recover their production levels. The Price System SECTION 1

7 Who is responsible for the cost? The price system believes that those who benefit from a good or service should pay for that product. Any costs that a producer must pay is therefore automatically passed on to a consumer. There are some situation where the price system fails and consumers are not- these limitations are called market failures. The Price System SECTION 1

8 3 Limitations of the price system (also called Market Failures: Externalities-when individuals involved in the production/consumer relationship benefit or are harmed as a result of the production or consumption The Price System SECTION 1

9 3 Limitations of the price system cont.: Public Goods When the government creates a service that it requires all citizens to pay for such as national defense or law enforcement even though not all feel that they benefit. Why? Because if people could choose not to pay, the services would not be as effective or exist at all. The Price System SECTION 1

10 3 Limitations of the price system: Instability Sometimes events cause the price system to change dramatically causing price to change that is outside the control of producers and consumers. For example, how would you handle a shortage of emergency supplies at a store in the path of a hurricane? The Price System SECTION 1