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Economics

Economics. Supplemental Notes for Chapter 5 PRICES. Benefits of the Price System. 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.

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Economics

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  1. Economics Supplemental Notes for Chapter 5 PRICES

  2. Benefits of the Price System • Information • Incentives • Choice • Efficiency • Flexibility

  3. Limitations of the Price System • Also called MARKET FAILURES • Fails to account for some costs and cannot distribute them appropriately.

  4. Market Failures • Externalities • Negative • Positive • Public Goods • Instability

  5. Questions • What is market equilibrium? • How does the price system handle product surpluses? Shortages? • How do shifts in demand and supply affect market equilibrium?

  6. Setting Prices • Price Ceilings • Price Floors

  7. Consequences of Setting Prices • Ceilings / Floors can prevent the market from reaching equilibrium. • EXAMPLE: Rental property in NYC.

  8. 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.

  9. 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.

  10. Consequences of Rationing • Unfair • Expensive • Creates black markets (underground economies)

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