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Standard. Explain how market power enables some market structures to affect their situations to varying degrees and to use this market power to increase prices and reduce output. Essential Question. What advantages does a price system have as a way to allocate resources?.

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  1. Standard • Explain how market power enables some market structures to affect their situations to varying degrees and to use this market power to increase prices and reduce output.

  2. Essential Question • What advantages does a price system have as a way to allocate resources?

  3. The Price System:Rationing and Allocating Resources • The market system, performs two functions: • Resource allocation: the market decides which goods will be made.

  4. The Price System:Rationing and Allocating Resources • The market system, performs two functions. • Price rationing: the market decides what the price will be.

  5. Price Rationing • A decrease in supply creates a shortage at the original price. • The lower supply is rationed to those who are willing and able to pay the higher price.

  6. Constraints on the Market • A price ceiling is a maximum price that sellers may charge for a good, usually set by government.

  7. Alternative Rationing Mechanisms • A black market is a market in which illegal trading takes place at market-determined prices.

  8. Price Floors • A price floor is a minimum price below which exchange is not permitted. • minimum wage • The result of setting a price floor will be excess supply, or higher quantity supplied than quantity demanded.

  9. Supply and Demand Analysis:An Oil Import Fee • At a world price of $18, imports are 5.9 million barrels per day. • The tax on imports causes an increase in domestic production, and quantity imported falls.

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