Download The Role of Prices - White Plains Public Schools

The Role of Prices
In this lesson, students will be able to
identify the role of price in creating market
equilibrium.
Students will be able to define and/or
identify the following terms:
The flexibility of price
Rationing
Price as a tool for restoring equilibrium
Prices are like
the lights on
a traffic light.
Prices are signals
for buyers and
sellers.
High Prices
• High prices send different signals to
consumers and suppliers.
• Consumers view high prices as a red light.
• Suppliers view high prices as a green light.
Consumers view
high prices as
a red light because
when prices are
high, money buys
less.
However, suppliers
view high prices
as a green light because
high prices signify
greater profits.
Low Prices
• Low prices also send different signals to
consumers and suppliers.
• Consumers love low prices.
• Suppliers are discouraged by low prices.
Low prices encourage
consumers.
Low prices allow
consumers to increase
their purchases. Money
buys more at lower prices.
Low prices
discourage
suppliers.
Low prices
lead to
decreased
profits.
The Flexibility of Price
• Fortunately, price is flexible and can be
easily changed.
• Market equilibrium can be restored by
changing the price of a good or service.
• The flexibility of price allows for market
equilibrium to be restored easily.
Flexible prices restore equilibrium.
Rationing
• Rationing is a system where the
government allocates all goods and
services.
• People do not buy goods and services.
• Rationing is not based on price.
• Centrally planned economies use
rationing.
During World War II, the United
States’ government used rationing
of some products.
Rationing is costly to administer because
it requires government planning.
Questions for Reflection:
• Why are prices like a traffic signal?
• Why do low prices encourage consumers
and discourage suppliers?
• Why do high prices discourage consumers
and encourage suppliers?
• Define rationing.
• Why is a price system less costly to
administer than rationing?