Prices

Notes by Diana

Price: a monetary value of a product as established by supply and demand.
1. High prices signal buyers to buy less and producer to produce more.
2. Low prices signal buyers to buy more and producers to produce less.

Advantages of Prices
1. Neutral: they favor neither the producer nor consumer.
2. Flexible: prices can change due to wars, or natural disasters. Buyers and sellers can adjust to those price changes, through their consumption and production.
3. Familiar and easy to understand: most people have known about prices most of their lives. There is no ambiguity about prices. If something costs $5.99, we know what do have to pay. This allows people to decisions quickly and efficiently.
4. No administrative cost: competitive markets find their own prices without any external help.

Allocations without prices: prices help us make the everyday economic decisions that allocate scarce resources.
Rationing
Ø It is the allocation of goods and service without prices.
Ø Rationing has been used during wartime.

Ration coupon
Ø A ticket that entitles the holder to obtain a certain amount of a product.

Problems with rationing
Ø Almost everyone thinks his/her share is too small
Ø Administrative cost of rationing.
Ø Negative impact on the incentive to produce.

Price as a System
Rebate
Ø Partial refund of a product’s original price.
Ø Ex. After the increase in prices in gas, the SUV markets were greatly affected. Since this vehicles use a lot of gas, the demand decreased. Leaving the dealerships with big inventories. To move these inventories some of the producers or manufactures offered consumers rebates. It was just as a temporary price reduction, because buyers were offered thousand of dollars back for every car they bought. (p.146)