Chapter 6 – Prices and Decision Making
6-1 Prices as Signals
CA Standards:
12.1 Students understand common economic terms and concepts and
economic reasoning
12.2.2 Discuss the effects of changes in supply and/or demand on the
relative scarcity, price, and quantity of particular products.
Objectives:
• Explain how prices act as signals to both producers and consumers.
• Describe the advantages of using prices as a way to allocate economic
products.
• Understand the difficulty of using rationing and other non-price criteria to
allocate scarce goods and services.
Write definition of key terms found on
page 134 Use glossary in textbook
• Economic model
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Market Equilibrium
Surplus
Shortage
Equilibrium Price
Loss Leader
Read pages 134 - 138
Economics: Principles & Practices
Prepare for Open notebook Quiz
 Key
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Rationing
Ration Coupon
Terms
page 128

Prices play an important role in our economy. They act as
signals that convey information to the buyers and sellers in a
market. A high price is a signal for producers to produce
more and for buyers to buy less. A low price is a signal for
producers to produce less and for buyers to buy more.
1. What two groups do prices link in a market?


Producers
Consumers
2. What are five advantages that prices have as
a method of allocating resources ?
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Prices
Prices
Prices
Prices
Prices
are neutral
are flexible
provide freedom of choice
have no administrative cost
are efficient
3. How does the price system provide for
freedom of choice?

The price system provides freedom of
choice by providing consumers with a range
of products at a variety of prices and not
forcing the consumer to purchase anything.
4. What are three disadvantages of allocating
resources through rationing?


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Rationing creates a problem with fairness.
Rationing has a high administrative cost.
Rationing diminishes incentives to work,
produce, and use goods carefully.
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
5. How does rationing diminish people’s
incentives to work and produce?
Rationing diminish people’s incentives to work and
produce by providing them with goods whether or
not they work or produce.
Be prepared for open
notebook quiz