The Role of Prices

1. The Role of Prices In this lesson, students will be able to identify the role of price in creating market equilibrium. Students will be able to define and/or identify the following terms: The flexibility of price Rationing Price as a tool for restoring equilibrium

2. Prices are like the lights on a traffic light. Prices are signals for buyers and sellers.

3. High Prices • High prices send different signals to consumers and suppliers. • Consumers view high prices as a red light. • Suppliers view high prices as a green light.

4. Consumers view high prices as a red light because when prices are high, money buys less.

5. However, suppliers view high prices as a green light because high prices signify greater profits.

6. Low Prices • Low prices also send different signals to consumers and suppliers. • Consumers love low prices. • Suppliers are discouraged by low prices.

7. Low prices encourage consumers. Low prices allow consumers to increase their purchases. Money buys more at lower prices.

8. Low prices discourage suppliers. Low prices lead to decreased profits.

9. The Flexibility of Price • Fortunately, price is flexible and can be easily changed. • Market equilibrium can be restored by changing the price of a good or service. • The flexibility of price allows for market equilibrium to be restored easily.

10. Flexible prices restore equilibrium.

11. Rationing • Rationing is a system where the government allocates all goods and services. • People do not buy goods and services. • Rationing is not based on price. • Centrally planned economies use rationing.

12. During World War II, the United States’ government used rationing of some products.

13. Rationing is costly to administer because it requires government planning.

14. Questions for Reflection: • Why are prices like a traffic signal? • Why do low prices encourage consumers and discourage suppliers? • Why do high prices discourage consumers and encourage suppliers? • Define rationing. • Why is a price system less costly to administer than rationing?