Economics
Supplemental Notes for Chapter 5
PRICES
Benefits of the Price System
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Information
Incentives
Choice
Efficiency
Flexibility
Limitations of the Price System
• Also called MARKET
FAILURES
– Fails to account for
some costs and cannot
distribute them
appropriately.
Market Failures
• Externalities
– Negative
– Positive
• Public Goods
• Instability
Questions
• What is market equilibrium?
• How does the price system handle product
surpluses? Shortages?
• How do shifts in demand and supply affect
market equilibrium?
Setting Prices
• Price Ceilings
• Price Floors
Consequences of Setting Prices
• Ceilings / Floors can
prevent the market
from reaching
equilibrium.
• EXAMPLE: Rental
property in NYC.
Rationing
• Sometimes supply of a
good is so low that a
government rations to
keep some supply.
• RATIONING: The
govt. or other
institution decides
how to distribute a
product.
Rationing doesn’t happen often
in free enterprise
• WWII – Rationing
tires, gas, meat, butter,
sugar, coffee.
• TODAY: College
sporting events.
Alums and current
students get priority in
seating.
Consequences of Rationing
• Unfair
• Expensive
• Creates black markets
(underground
economies)