Prices as Signals

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Prices as Signals

• Chapter 6.1

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Did You Know?

• During the oil crisis in the early 1970s, the
  proposed gas rationing program raised serious
  differences of opinion among Americans.
• Some people argued that every adult American
  should get the same number of gas rationing
  coupons.
• Others argued that owners of newer, more
  fuel-efficient cars would not need as many
  coupons as owners of older, gas-guzzling models.
• Those who lived in western states believed they
  should receive more coupons than Easterners
  because they traveled longer distances.
• Some people called for every car owner to receive
  a certain number of coupons others said this
  plan discriminated against families with several
  drives who share one car.

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I. Advantages of Prices

• Prices are neutral because they do not favor the
  buyer or the consumer. They are the result of
  competition.
• Prices are flexible, allowing for the shocks of
  unforeseen events and changes in the market.
• Prices have no administrative costs.
• Prices are familiar and easily understood.
• Why does the neutrality of prices stimulate
  competition?

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II. Allocations Without Prices

• Rationing, or the system where the government
  decides everyones fair share, lead to the
  question of fairness.
• Rationing leads to high administrative costs.
• Rationing leads to fewer incentives to work and
  produce.
• Imagine that no matter how much you studied, you
  already knew you were going to get a B in
  Economics. How would this affect your incentive
  to study?

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III. Prices as a System

• Together, prices comprise a system that helps
  buyers and sellers allocate resources between
  markets, linking all markets in the economy.
• Why do you think rebates were not enough to
  reenergize the big car market during the 1970s
  energy crisis?