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Rationing & Black Market Economies

Explore the problem of scarcity and how goods and services are rationed in various ways. Learn how price serves as a rationing device and the consequences of price controls leading to black markets.

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Rationing & Black Market Economies

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  1. Rationing & Black Market Economies

  2. The Problem of Scarcity • Scarcity - Limited quantities of resources to meet unlimited wants. • If goods are scarce, they must berationed. • Rationingis a system of allocating scarce goods and services according to certain criteria. • Ex. Physical prowess, public esteem, age, need, merit, willingness to pay money, etc.

  3. Competition and Price • Competition is the natural result of scarcity. • Individuals striving to meet the criteria used to ration goods. • Price - society rationing on the basis of a willingness to pay money. • Individuals will work to earn money and those that are able and willing to pay the price will receive the good.

  4. Price as a Rationing Device • When goods are in short supply, consumers compete against each other to obtain the good. • In a market economies the result of this competition is an increase in price; • Price serves as an important rationing device in market economies and a signal for economizing. • What happens when price controls are implemented?

  5. Other Rationing Methods • When prices are fixed, an economy must develop another way to ration scarce resources: • Need • First come, first served • Lottery, equal share for all • Merit Can you think of any others??

  6. What is a black market? • Black Markets - A market consisting of all commerce on which applicable taxes or regulations are avoided. • A black market can consist of either… • Legal goods sold at illegal prices • Illegal goods • Black markets often develop when price controls are implemented

  7. How do Price Controls Lead to Black Markets? • Effects of Price Ceilings: • Demand by consumers will increase; • Seller’s profits decrease; • In order to maximize profits, sellers will reduce supply; • Shortages result; • Consumers who are willing and able to pay a higher price for the good will find a way to obtain it on the black market.

  8. Black Markets cont… • How do black markets affect the supply of goods? • Consumers who are willing/able to pay will move into the black market; • Demand for the good will increase along with the black market price; • Suppliers will divert more of the product onto the black market in order to make more money; • Shortages will be exacerbated in the legal market.

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