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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. Prices are like

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The role of prices

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


Prices are like

the lights on

a traffic light.

Prices are signals

for buyers and

sellers.


High prices
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.


Consumers view

high prices as

a red light because

when prices are

high, money buys

less.


However, suppliers

view high prices

as a green light because

high prices signify

greater profits.


Low prices
Low Prices

  • Low prices also send different signals to consumers and suppliers.

  • Consumers love low prices.

  • Suppliers are discouraged by low prices.


Low prices encourage

consumers.

Low prices allow

consumers to increase

their purchases. Money

buys more at lower prices.


Low prices

discourage

suppliers.

Low prices

lead to

decreased

profits.


The flexibility of price
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.



Rationing
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.


During World War II, the United

States’ government used rationing

of some products.


Rationing is costly to administer because

it requires government planning.


Questions for reflection
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?


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