Prices help allocate resources efficiently by signaling supply and demand information to buyers and sellers. Without prices, the government would need to ration goods and services, which may not be fair, cost-effective, or incentivize individuals. When the government intervenes in markets by setting price floors or ceilings, it distorts market outcomes and prevents accurate price signals. Government intervention sometimes aims to support certain industries, like agriculture, but can undermine free market forces.

1. Price as Signals

2. Price is the monetary value of
a product as established by
supply and demand.

3.  Prices do more than convey
information to buyers and sellers in
a market. Prices help buyers and
sellers allocate resources more
effectively and efficiently.
 Without Prices you would have to
use a different system to allocate
the what, how and for whom
allocation.
 Rationing – a system where
government decides everyone’s
“fair share” is one answer.
Note!
Is this system fair?
Is it cost effective?
Does it diminish individual
incentive?

4. Equilibrium is the condition
where two forces balance one
another.
Equilibrium quantity is the
quantity that is both demanded
and supplied at the equilibrium
price.
Equilibrium price is the price at
which the quantity demanded
equals the quantity supplied.

5. Market Equilibrium
In a competitive market, the
adjustment process moves
toward market equilibrium.

6. Surplus is the condition in
which the quantity supplied
is greater than the quantity
demanded at a certain
price.
Shortage is the condition in
which the quantity
demanded is greater than
the quantity supplied at a
certain price.

7. The equilibrium price is
the price that “clears the
market” by leaving
neither a surplus or
shortage at the end of
the trading period.

8. Governmental involvement
if the allocation of goods
and services distorts market
outcomes.
When government sets
prices at “socially
desirable” levels the price
system cannot transmit
accurate information to
other buyers and sellers in
the market.

9. Government intervention is
the condition where
government sets prices.
Price ceiling - maximum legal
price that can be charged for
a product.
Price floor - lowest legal
price that cab be paid for a
good or service.
This intervention occurs when
government feels the market
system is not working.

10. Price supports are most evident in
agriculture. The US Department
of Agriculture tinkers with the free
market system using target prices,
land banking, and price supports
to alter market forces.
 Target Price – essentially a price floor
 Deficiency payment – a check for the
difference between the target price and
the market price
 Nonrecourse loans – a loan that carries
neither a penalty or obligation to repay
the loan

11. Markets are impersonal
mechanisms that bring
buyers and sellers
together. Markets are
said to “talk” when
prices in them move up
or down significantly in
reaction to events that
take place elsewhere in
the economy.