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Chapter 6 Prices and Decision Making Section 1 Prices as Signals Page 142 Price • The monetary value of a product as established by supply and demand – it is a signal that helps us make economic decisions • High Prices signal buyers to buy less and producers to produce more • Low Prices signal buyers to buy more and producers to produce less. Advantages of Prices • Prices help produces and consumers decide the three basic questions of WHAT, HOW, and FOR WHOM to produce. • In a competitive market economy prices are neutral because they favor neither the producer not the consumer • Prices are flexible allowing sellers and buyers to adjust their production and consumption • Prices have no cost of administration – they tend to find their own prices without outside help or interference Allocation Without Prices • Rationing – a system under which a government agency decides everyone’s “fair” share. • Ration coupon ticket or a receipt that entitles the holder to obtain a certain amount of a product Problems with Rationing • Almost everyone feels that his or her share is too small • Cost of rationing - Someone must pay the salaries and the printing and distribution costs of coupons (fraud) • Negative impact on the incentive to produce Prices as a System • The price system does more than help individuals make decisions – they serve as signals that help allocate resources between markets – The Price of Oil v SUV’s and rebates – Prices as an information network linking all markets in the economy.