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Economics
Supplemental Notes for Chapter 5
PRICES
Benefits of the Price System
• Information• Incentives• Choice• Efficiency• Flexibility
Limitations of the Price System
• Also called MARKET FAILURES– Fails to account for
some costs and cannot distribute them appropriately.
Market Failures
• Externalities– Negative
– Positive
• Public Goods• Instability
Questions
• What is market equilibrium?
• How does the price system handle product surpluses? Shortages?
• How do shifts in demand and supply affect market equilibrium?
Setting Prices
• Price Ceilings• Price Floors
Consequences of Setting Prices
• Ceilings / Floors can prevent the market from reaching equilibrium.
• EXAMPLE: Rental property in NYC.
Rationing
• Sometimes supply of a good is so low that a government rations to keep some supply.
• RATIONING: The govt. or other institution decides how to distribute a product.
Rationing doesn’t happen often in free enterprise
• WWII – Rationing tires, gas, meat, butter, sugar, coffee.
• TODAY: College sporting events. Alums and current students get priority in seating.
Consequences of Rationing
• Unfair• Expensive• Creates black markets
(underground economies)