Prices as a System
Prices help consumers and producers
make decisions
 Tells
sellers where to sell and
consumers where to buy
Prices serve as signals
 Allocate
resources between markets
 Can impact many markets
Fixed Prices
 Why are prices fixed?
 Special
policies
interest groups influence government
 Economists believe the costs of fixed price
often outweighs the benefits
Price Ceilings





Maximum legal price that
can be charged
Result in shortages
Prices no longer allocate
resources
Threatens profits of supplier
Positive for people who
receive the good

Negative for those who
do not
Price Floors

Lowest legal price


Ex. Minimum wage
Can decrease demand
Predicting Prices
 Use models to explain and predict
 Predict changes in supply
 Ex.
Agriculture
 Factor in demand elasticity
 Considered
with a change in supply
 Illustrate possible changes in demand
 Ex.
Gold
Agricultural Price Supports
 Government will try to stabilize prices
 Use
loan supports and deficiency payments in
the 1930s Commodity Credit Corporation
 Loan Supports
 Put
crop up as security
 Repay loan after selling crop, or give crop and
keep loan money
 If unable to repay, they just forfeit the crop
 Non-recourse
 Creates
loan
large stockpiles of food
Agricultural Price Supports
 Deficiency Payments
 Encouraged
 CCC
farmers to sell on the open market
would make up payment differences between
actual price and target price
 Reforming Price Supports
 Federal
Agricultural Improvement and Reform
Act – 1996
 Cash
payments took place of price supports and
deficiency payments
 LDP
– Loan Deficiency Payment