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PRICES

Explore the impact of market prices on allocation and the importance of information. Learn about the effects of price floors and ceilings on surplus. Discover historical examples such as the gas shortage and wheat surplus in the 1970s and 1980s.

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PRICES

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  1. PRICES Allocation and Information

  2. When left alone, the market will always find the optimal (market-clearing) price! P S QS > QD = Surplus P1 Sale “The Happy Place” PM Market – Clearing Price Equilibrium QD=QS Bid-up QD > QS = Shortage P2 D Q QS QD QD QE QS Pizza

  3. 1970’s • Gas Shortage – gas lines • OPEC • Organization of the Petroleum Exporting Countries • Middle East • Religious Revolutions • “Western Influence” • Sharply decreased the supply of oil to the United States and other western countries

  4. 1970’s S1 S S1 P P S P2 $2.00/g P2 P1 $.25/g P1 D D Q Q2 Q1 Q Q2 Q1 OIL GAS Cost of producing gas Soil Poil Sgas Pgas

  5. 1970’s • Cars of the 70’s • “Gas Guzzlers” • Muscle Cars • Big Engines • Heavy Averaged 8 mi./gallon !!!!!

  6. What the government did to solve the problem with gas prices…. P S $2.00 PM Equilibrium QD=QS QD > QS = Shortage $1.00 PC D Price Ceiling: A maximum legal price, below market price Q QS QD QE Gas

  7. Effects of the Gas Shortage • Short-term effects: • Gas lines / gas rationing • “Black Market” for gas • Gas related crime • Long-term effects: • Nearly destroyed the US auto industry • Delayed the development of alternative fuel sources

  8. 1980’s • “Cold War” • US v. USSR • War of ideology – capitalism v. communism • Arms race • Invaded Afghanistan • Boycotted Olympics • Armed the resistance • Led by Osama Bin Laden • Instituted full economic embargo

  9. Effects of the Embargo against the Soviet Union…. P S S1 $30/b PM $10/b P1 D Q QE Q1 Wheat

  10. What the government did to help the farmers…… P S1 Price Floor: A minimum legal price, above market price $20/b PF QS > QD = Surplus $10/b P1 D Q QD Q1 QS Wheat

  11. Effects of the Wheat Surplus • Farmers couldn’t sell wheat at the floor price, so government bought it • Had the market been left alone, farmers would have reallocated resources to more profitable crops

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