DateDate: March 21, 2013: March 21, 2013

TopicTopic: The Role of Prices: The Role of Prices

AimAim: How do prices play a role in the : How do prices play a role in the free market? free market?

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• Prices are a tool for distributing goods and resources throughout the economy.

• Price helps move land, labor, capital into the hands of producers, and finished goods into the hands of buyers.

SO A GUY WALKS INTO THE STORE….WOULD YOU LOOK THROUGH THIS? WHY NOT?

• Buyers/Sellers look at prices to find information on a good’s demand and supply.

• Tells a consumer or producer how to adjust.

• Whether goods are in short supply or readily available.

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• High price: a specific good is in demand and more is produced.

• New suppliers will also join the market.

• Low price: a good is being overproduced.

PEOPLE BUY ABERCROMBIE AND FITCH CLOTHING BECAUSE IT SAYS ABERCROMBIE AND FITCH!

ABERCROMBIE PRODUCES MORE CLOTHING AT A HIGH PRICE BECAUSE PEOPLE ARE WILLING TO PAY FOR IT.

• When a supply or demand shift changes the equilibrium, price and quantity supplied need to change to solve problems.

• Prices: Easily increase or decrease.

• Raising prices is the quickest way to resolve excess demand.

Income, population etc. with demand

Income costs, technology with supply

• Free Market pricing distributes goods through millions of decisions daily by consumers and suppliers.

• Prices helps goods flow through the economy without a central plan.

• Command Economy: One organization decides what goods are produced and how much stores will charge for these goods.

BUT!

• When people conduct business without regard for government controls on price or quantity.

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Adam SmithAdam Smith• Businesses prosper by finding out what people want, and then providing it.

SUMMARY:

How do prices play a role in the

Free Market?

1)Imperfect Competition: Can affect prices, and higher prices can affect consumer decisions.

2)Spillover Costs: Externalities, that include costs of production.

3)Imperfect Information: Can prevent a market from operating smoothly