Download Prices - Flushing Community Schools


How do prices help us make decisions?
› Main Idea
 Prices are decision-making tools that affect
the behavior of individuals, businesses,
markets, and industries.
 Prices act as signals that tell people to buy
more or less of a product, and producers to
produce more or less of a product.
 Prices help answer the questions WHAT, HOW,
and FOR WHOM to produce because they are
neutral, flexible, familiar, and efficient.

Price
› The monetary value of a product.

High Prices
› Signal Producers to make more.

Low Prices
› Signal Producers to make less
Neutrality
 Flexibility
 Familiarity
 Efficiency


Neutrality
› In a competitive market economy, prices
are neutral because they favor neither the
producer nor the consumer. Since prices are
the result of competition between buyers
and sellers, they represent compromises, or
agreements, that both sides can live with.

Flexibility
› Prices in a market economy help provide flexibility.
Events that cannot be predicted, such as natural
disasters and war, can affect prices. For example,
when Hurricane Sandy struck the northeast United
States in October 2012, oyster gatherers in the
Chesapeake Bay could not work for several days.
This caused the price of oysters to temporarily
increase as far away as Georgia. Buyers and sellers
then reacted to the new level of prices and adjusted
their consumption and production accordingly. This
helped the system function smoothly again. The
ability of the price system to absorb unexpected
“shocks” is one of the strengths a market economy.

Familiarity
› Most people have known about prices all
their lives. As a result, prices are familiar and
easy to understand. There is no uncertainty
or misunderstanding over a price—if
something costs $1.99, then we know exactly
what we have to pay to get it. This allows
people to make quick and easy decisions
with a minimum of time and effort.

Efficiency
› Finally, prices have no administration or
outside help. Competitive markets tend
to help products find their own prices
without outside help or interference. No
administrators or office workers need to
be hired, no committees formed, no laws
passed, or other decisions made. Even
when prices adjust from one level to
another, the changes are usually so slow
and steady that people hardly notice.

Rationing:
› a system in which government decides
everyone’s “fair” share.

Main Ideas
› Implementing a rationing system that everyone
perceives as fair is almost impossible.
› Rationing has high administrative expenses.
› Rationing distorts market incentives and does
not solve the basic problem of supply and
demand.
› Rationing systems can be abused and misused
fairly easily.
Perceived Fairness
 Administrative Expense
 Distorted Incentives
 Abuse and Misuse



Perceived Fairness
The debate over fairness began immediately. People in
small towns thought they should have more coupons than
people in big cities, because big cities had better masstransit systems. People with older cars thought they
should have more coupons, because their cars were
less fuel-efficient than newer ones. However, people
with newer vehicles thought that this would punish them
for having bought more expensive, fuel-efficient cars.
Couples with several cars thought they should have
more coupons because they had more cars. Couples
with one car thought that would not be fair to them. As
a result, making a distribution system that everyone
thought would be fair seemed almost hopeless.

Administrative Expense
› The administrative cost of rationing is another major
issue. Someone would have to pay for the printing
and distribution costs of the coupons, including the
salaries of workers. Every community would also need
“review boards” so that someone could listen to
those who thought that they should have had more
coupons. In 1974, nearly five billion gasoline ration
coupons were printed just in case the government
decided to go ahead with a rationing program. The
plans, which were never carried out, were to ship the
coupons to every post office in the country. Then
everyone would have access to them after the
“fairness” problem was resolved.

Distorted Incentives
› Rationing programs are specifically designed to take
the place of supply and demand. The one in 1974
that was designed to keep the cost of gasoline low
for consumers would have had a negative effect on
market incentives in three different ways: Energy
companies would have been discouraged from
producing more gasoline. Automobile companies
would have had less incentive, or motivation, to
produce more fuel-efficient vehicles. And consumers
would have had less incentive to reduce
unnecessary driving to save gasoline. None of these
incentives solved the basic problem of too little
supply and too much demand.

Abuse and Misuse
› Finally, no matter how much care was taken, some
coupons would have been stolen, sold, or
counterfeited. The 1974 gasoline coupons had
another unique problem. To make them difficult to
counterfeit, or imitate, each carried a high-quality
image of President Washington like the one on a
dollar bill. Unfortunately the likeness was so good that
a coupon could also be used in a dollar-changing
machine. This gave anyone with a coupon two
options. They could use it for a gallon of gas, which
cost about sixty cents, or they could use it in a coin
changer to get four quarters. These problems were
almost impossible to solve. It was mostly for these
reasons that the 1974 gasoline rationing coupons
were never issued and were later destroyed.

What types of governments do you think
are most likely to make allocations
based on rationing? Why?
› Totalitarian; those types of governments
generally control purchasing decisions

What are the differences between the
price system and rationing?
› Price system: people make their own
purchasing decisions based on the prices of
goods and services. Rationing system:
government agency decides what and how
many goods and services people will
receive.

Preices are seen as the most efficient
way to….
› Allocate resources

Economists see prices as a system
because:
› It links all markets in the economy.
 Read pg 158-159 on how markets are linked to
gas prices.
› How do prices help allocate resources
between markets?
 Price increases in a certain market lower
demand, which causes manufacturers to shift
resources to more profitable markets.