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Price system or Market system
- An economic system in which relative prices are constantly changing to reflect changes in supply and demand for different commodities.The prices of those commodities are signals to everyone within the system as to what is relatively scarce and what is relatively abundant.
- Higher Prices = Scarcity
Lower Prices = abundant
An act of trading, done on an elective basis,in which both parties to the trade expect to be better off after the exchange.
All of the costs associated with exchange,including the informational costs of finding out the price and quality, service record, and durability of a product, plus the cost of contracting and enforcing that contract.
the more organized the market, the lower the transaction costs.
The Role of Middlemen
As long as there are costs of bringing together buyers and sellers, there will be an incentive for intermediaries, normally called middlemen, to lower those costs.
This means that middlemen specialize in lowering transaction costs.
Changes in Demand and Supply (shock)
Market equilibrium can change whenever there is a shock caused by a change in a ceteris paribus condition for demand or supply. A shock to the supply and demand system can be represented by a shift in the supply curve, a shift in the demand curve, or a shift in both curves. Any shock to the system will result in anew set of supply and demand relationships and a new equilibrium.
Changes in Demand and Supply
Increase or decrease in supply and demand in the same direction at the same time = quantity demanded is ambiguous (Both Rise) = Equilibrium price is uncertain without more information
Increase or decrease in supply and demand at opposite direction at the same time = quantity demanded predictable = Equilibrium price is uncertain without more information
both occurrences tend to push up the equilibrium price, so the equilibrium price definitely rises.
rationing function of prices.
The synchronization of decisions by buyers and sellers that leads to equilibrium
There are ways other than price to ration goods.
1. First come, first served
- 2. Political power
- 3. Physical force
- 4. Cultural, religious, and physical differences have been and are used as rationing devices throughout the world.
Economists cannot say which system of rationing is “best.” They can,however, say that rationing via the price system
leads to the most efficient
use of available resources.
The rationing function of prices is prevented when governments impose price controls.
RATIONING BY WAITING
rationing by queues (line)
Whoever is willing to wait inline the longest obtains the good that is being sold at less than the market clearing price.
All who wait in line are paying a higher total outlay than the money price paid for the good.
To calculate the total outlay expended on the good, we must add up the money price plus the opportunity cost of the time spent waiting.
RATIONING BY RANDOM ASSIGNMENT OR COUPONS
Sometimes rationing by random assignment is used to fill slots in popular classes.
coupons that allowed people to purchase specified quantities of rationed goods, such as meat and gasoline. To purchase such goods, they had to pay a specified price and give up a coupon.
Government-mandated minimum or maximum prices that may be charged for goods and services.
A legal maximum price that may be charged for a particular good or service.
product prices, wages, rents, and interest rates.
- A legal minimum price below which a good or service may not be sold. Legal minimum wages are an example.
- wages and agricultural products
Nonprice rationing devices
All methods used to ration scarce goods that are price-controlled. Whenever the price system is not allowed to work, non price rationing devices will evolve to ration the affected goods and services.
A market in which goods are traded at prices above their legal maximum prices or in which illegal goods are sold.
the true implicit price of a price-controlled good or service (Black Market Price)
Black markets also occur when goods are made illegal
Is a system under which the local government tells building owners how much they can charge their tenants for rent.
rental prices three functions:
(1) to promote the efficient maintenance of existing housing and to stimulate the construction of new housing
(2) to allocate existing scarce housing among competing claimants
(3) to ration the use of existing housing by current demanders. Rent controls interfere with all of these functions.
Effects of Rent Ceileings
1. When rental rates are held below equilibrium levels, property owners cannot recover the cost of maintenance, repairs, and capital improvements through higher rents
2. Rent controls discourage the construction of new rental units. Rents are the most important long-term determinant of profitability,and rent controls artificially depress them.
3. Rent controls also affect the current use of housing because they restrict tenant mobility. “housing gridlock.”
This is a large up-front cash payment, usually illegal but demanded nonetheless—just one aspect of the black market in rent-controlled apartments.
Who benefits from rent control?
Ample evidence indicates that upper-income the most. These people can use their mastery of the bureaucracy and their large network of friends and connections to exploit the rent control system.
Why Price Supports?
The government simply chooses a support price for an agricultural product and then acts to ensure that the price of the product never falls below the support level.
Who Benefits from Agricultural Price Supports?
traditionally, the larger the farm, the bigger the benefit from agricultural price supports.
Marketing loan (Price Support)
These programs advance funds to farmers to help them finance the storage of some or all of their crops. The farmers can then use the stored produce as collateral for borrowing or sell it to the government and use the proceeds to repay debts.
Minimum wage or living wage
A wage floor, legislated by government, setting the lowest hourly rate that firms may legally pay workers.
A number of municipalities refer to their minimum wage rules as “living wage” laws.
(minimum wages consistent with living standards they deem to be socially acceptable—that is, overall wage income judged to be sufficient to purchase basic items such as housing and food)
A physical supply restriction on imports of a particular good, such as sugar. Foreign exporters are unable to sell in the United States more than the quantity specified in the import quota.
The most obvious restriction is an outright ban on the ownership or trading of a good. It is currently illegal to buy and sell human organs. It is also currently illegal to buy and sell certain psychoactive drugs such as cocaine, heroin, and methamphetamine.