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Published byBeatrice Harris Modified over 9 years ago
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The Role of Prices in the Free Market
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Prices in the Free Market In the free market prices are a tool for distributing They are nearly always the most Prices help move land, labor and capital Prices move finished goods into the
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The Advantages of Prices Prices provide a language for buyers and sellers Price as incentive: –Buyers and sellers look at prices to –Prices communicate to both buyers and sellers –Producers respond not only to the demand, but also to the
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The Advantages of Prices Prices as signals –High price of a good tells producers that if the demand for a good at a –Low price of a good tells producers that the good is being overproduced –High price of a good tells consumers to think –Low price of a good tells consumers to buy
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The Advantages of Prices Flexibility –Prices are much more flexible than output levels –Prices can easily be increased to solve a problem of excess demand and they can be Supply shock a sudden –Creates a problem of excess demand because suppliers –Resolved by –The people who have enough money remain in the market at the new price and
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A Wide Choice of Goods Prices give suppliers a way to allow Prices provide an easy way for you to Prices allow producers to target the audience they want with the Black market a market
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Efficient Resource Allocation All the advantages of a free market allow This means that land, labor, and capital will be used for A market system, with its freely changing prices, ensures that resources go to A price-based system ensures that resource use will adjust to
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Market Problems Problem 1 imperfect competition: can affect prices, and higher prices can affect consumer decisions –If only one producer is selling the good, this producer Problem 2 spillover costs: costs of production that affect people –Since producers do not have to pay spillover costs, their total costs seem low, and they will produce more than equilibrium quantity of a good. Problem 3 imperfect information: if you don’t have enough information about a product,
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