Prices as Signals:

1
Prices as Signals

• Chapter 6 Section 1

2
I. Advantages of Prices

• A. Prices are neutral because they do not favor
  the buyer or the consumer. They are the result of
  competition.

3

• B. Prices are flexible, allowing for the shocks
  of unforeseen events and changes in the market.

4
(No Transcript)
5

• C. Prices have no administration costs.

6

• D. Prices are familiar and easily understood.

7
II. Allocations Without Prices

• A. Rationing, or the system where the government
  decides everyones fair share, leads to the
  question of fairness.

8

• B. Rationing leads to high administrative costs.

9

• C. Rationing leads to fewer incentives to work
  and produce.

10
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.