ECONOMICS

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ECONOMICS

• CHAPTER 5, SECTION 1-
• THE PRICE SYSTEM

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I. The Price System

• A. The price system allows producers and
  consumers to communicate to each other, balance
  supply and demand by compromising on production
  levels, and is relied upon by consumers and
  producers to answer the basic economic questions.
• B. There are benefits and limitations to the
  price system.

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II. Benefits

• A. Information-Producers gather information about
  the cost of resources to produce their goods and
  services.
• Consumers gather information about prices to make
  informed purchasing decisions.

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II. Benefits

• B. Incentives-High prices encourage producers to
  produce more goods and services.
• Low prices encourage consumers to purchase more
  goods and services.

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II. Benefits

• C. Choice-High incentives encourage producers to
  increase the variety of goods and services they
  are producing.
• Consumers benefit by having a wide selection of
  goods and services from which to choose.

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II. Benefits

• D. Efficiency-When producers know which goods and
  services consumers demand, they do not waste
  resources producing unwanted goods and services.
• Prices help consumers make decisions by
  eliminating options not available to them.

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II. Benefits

• E. Flexibility-Natural disasters, trends, the
  weather, etc. can create demand for goods and
  services (very quickly, at times). Producers can
  raise prices to lower demand for goods and
  services or producers cannot raise prices and
  cause a shortage of goods and services

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III. Limitations (market failures)

• A. Positive Externalities-This is when someone
  who does not buy or sell a good or service
  benefits from it. This is a failure because the
  price system fails to assign the entire cost of
  production to all those who benefit.

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III. Limitations (market failures)

• B. Negative Externalities-This is when someone
  who does not buy or sell a good or service bears
  part of the cost of it. This is a failure because
  the price system fails to assign the entire cost
  of production to only the producers and consumers
  of the product.

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III. Limitations (market failures)

• C. Public Goods-These are goods and services
  which are consumed (or may be consumed) by all
  members of a group. These are market failures
  because the price system fails to assign a cost
  of using the good/service to all consumers.

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III. Limitations (market failures)

• D. Instability-The flexibility of the price
  system can cause prices to swing drastically high
  or drastically low. This is a failure because it
  causes producers and consumers to be unable to
  rely on stable prices when making decisions.

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