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© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !air Karl Case, Ra !air

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Prepared by: FernandoPrepared by: FernandoQuijano and Yvonn QuijanoQuijano and Yvonn Quijano

The Price System and DemandThe Price System and Demandand Supplyand Supply

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© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ra !air

#he Price $ stem#he Price $ stem

%#he mar&et s stem, also calle' the#he mar&et s stem, also calle' the price pricesystem,system, performs t(o important an'performs t(o important an'closel relate' functions )closel relate' functions )

• Price Rationing Price Rationing

% Resource AllocationResource Allocation

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© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ra !air

Price RationingPrice Rationing

% Price rationing Price rationing is theis theprocess b (hich theprocess b (hich the

mar&et s stem allocatesmar&et s stem allocatesgoo's an' ser*ices togoo's an' ser*ices toconsumers (hen +uantitconsumers (hen +uantit'eman'e' e cee's'eman'e' e cee's+uantit supplie'-+uantit supplie'-

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© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ra !air

Price RationingPrice Rationing

% . 'ecrease in suppl . 'ecrease in supplcreates a shortage atcreates a shortage atPP 00 - uantit 'eman'e'- uantit 'eman'e'

is greater than +uantitis greater than +uantitsupplie'- Price (illsupplie'- Price (illbegin to rise-begin to rise-

% #he lo(er total suppl#he lo(er total supplisis rationed to thoserationed to thosewho are willing andwho are willing andable to pay able to pay the higherthe higher

price-price-

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© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ra !air

Price RationingPrice Rationing

% #here is some price#here is some pricethat (ill clear anthat (ill clear anmar&et-mar&et-

% #he price of a rare#he price of a rarepainting (ill eliminatepainting (ill eliminatee cess 'eman' untile cess 'eman' untilthere is onl one bi''erthere is onl one bi''er(illing to bu the single(illing to bu the singlea*ailable painting-a*ailable painting-

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© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ra !air

.lternati*e Rationing echanisms .lternati*e Rationing echanisms

% . price ceiling price ceiling is a ma imum pricethat sellers ma charge for a goo',usuall set b go*ernment-

%Queuing Queuing is a nonprice rationings stem that uses (aiting in line as a

means of 'istributing goo's an'ser*ices-

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.lternati*e Rationing echanisms .lternati*e Rationing echanisms

%Favored customersFavored customers are those (ho recei*especial treatment from 'ealers 'uringsituations (hen there is e cess 'eman'-

%Ration coupons are tic&ets or coupons thatentitle in'i*i'uals to purchase a certainamount of a gi*en pro'uct per month-

%#he problem (ith these alternati*es is that#he problem (ith these alternati*es is thate cess 'eman' is create' but not eliminate'-e cess 'eman' is create' but not eliminate'-

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.lternati*e Rationing echanisms .lternati*e Rationing echanisms

% 1n 34", the1n 34", thego*ernment use' ango*ernment use' analternati*e rationingalternati*e rationing

s stem to 'istribute thes stem to 'istribute thea*ailable suppl ofa*ailable suppl ofgasoline-gasoline-

% .t an impose' price of .t an impose' price of54 cents per gallon, the54 cents per gallon, theresult (as e cessresult (as e cess'eman'-'eman'-

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.lternati*e Rationing echanisms .lternati*e Rationing echanisms

% . . black market black market is ais amar&et in (hich illegalmar&et in (hich illegaltra'ing ta&es place attra'ing ta&es place at

mar&et 'etermine'mar&et 'etermine'prices-prices-

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.lternati*e Rationing echanisms .lternati*e Rationing echanisms

% 7o matter ho( goo' the intentions of pri*ate7o matter ho( goo' the intentions of pri*ateorgani8ations an' go*ernments, it is *erorgani8ations an' go*ernments, it is *er'ifficult to pre*ent the price s stem from'ifficult to pre*ent the price s stem fromoperating an' to stop the (illingness to paoperating an' to stop the (illingness to pafrom asserting itself-from asserting itself-

% 9ith fa*ore' customers an' blac& mar&ets, the9ith fa*ore' customers an' blac& mar&ets, thefinal 'istribution ma be e*en more unfair thanfinal 'istribution ma be e*en more unfair thanthat (hich (oul' result from simple pricethat (hich (oul' result from simple pricerationing-rationing-

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Prices an' the .llocation of ResourcesPrices an' the .llocation of Resources

% Price changes resulting from shifts of 'eman' in outputPrice changes resulting from shifts of 'eman' in outputmar&ets cause profits to rise or fall-mar&ets cause profits to rise or fall-

% Profits attract capital: losses lea' to 'isin*estment-Profits attract capital: losses lea' to 'isin*estment-

% Higher (ages attract labor an' encourage (or&ers toHigher (ages attract labor an' encourage (or&ers toac+uire s&ills-ac+uire s&ills-

% .t the core of the s stem, suppl , 'eman', an' prices in .t the core of the s stem, suppl , 'eman', an' prices ininput an' output mar&ets 'etermine the allocation ofinput an' output mar&ets 'etermine the allocation ofresources an' the ultimate combinations of thingsresources an' the ultimate combinations of thingspro'uce'-pro'uce'-

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$uppl an' ;eman' .nal sis)$uppl an' ;eman' .nal sis) .n ,imports are 5-3 million barrelsimports are 5-3 million barrels

per 'a -per 'a -

% #he ta on imports causes an#he ta on imports causes anincrease in 'omestic pro'uction, an'increase in 'omestic pro'uction, an'+uantit importe' falls-+uantit importe' falls-