Economics 6-1 prices as signals

Rationing creates problem #2 Allocation w/out prices

A high cost of administrative cost, someone has to manage the program

Rationing

A method used by governments to allocated who gets what and how much.

Rebate

A partial refund of the original price of the product

Ration coupon

A ticket the entitles the holder to obtain a certain amount of a product.

Advantages of allocation of Price #1

Are neutral because the favor neither the producer nor the consumer, this is because prices are the result of competition between buyers and sellers. The price is a price both can live with

Low prices

Are signals for producers to produce less and for buyers to buy more

High prices

Are signals for producers to produce more and for buyers to buy less

Prices

Communicate information and provide incentives to buyer and sellers

Main Idea

Competitive markets and prices are important to capitalism

Rationing creates problem #3 Allocation w/out prices

Creates a negative impact on people's incentive to work and produce.

Prices as signal

Prices are a signal help us make our economic decisions. Prices communicate info and provide incentives to buyers and sellers.

Advantage of allocation of Price #4

Prices are something we have been dealing with our whole lives. So prices are familiar and easily understood. This allows us to make decisions quickly with minimum time and effort.

How do producers and consumers react to prices?

Prices communicate info and provide incentives to buyers and sellers. High prices are signals to producers to produce more and buyers to buy less. Low prices are signals for producers to produce less and for buyers to buy more.

Prices as a system

Prices do more than convey information to buyers and sellers in a market, they also serve as signals that help allocate resources between markets

Advantage of allocation of Price #3

Prices have no cost of administration, they find the price without outside help or interference

Advantage of allocation of Price #2

Prices in a market economy are flexible. Price flexibility allows the market economy to allow for change.

What are the advantages of using prices as a way to allocate economic products?

Prices serve as the link between producers and buyers, so prices provide the WHAT, HOW, and FOR WHOM. Economy runs smoothly, and if we didn't have prices the decision about goods and services would have to be determined another way, such as the government

Why is it difficult to allocate a price for scarce goods and services without using prices?

Who would decide who gets what and when, and what would be the criteria on who gets what.

Definition of Price

The monetary value of a product as established by supply and demand

Rationing creates problem #1 Allocation w/out prices

The problem of fairness, everyone thinks his share is not enough