SECTION 1
The Price System
Essential Question:
 Explain how the price system allows
consumers and producers to communicate
with each other and identify 5 benefits and 3
shortcomings of the price system.
1
SECTION 1
The Price System
What is the price system and what
does it do?
 The system that producers/consumers use to
communicate their needs and wants to each
other.
 to tell consumers how much it costs to
produce or distribute a good or service
 to tell producers how much consumers are
willing and able to pay for a product
2
SECTION 1
The Price System
5 Benefits of the price system
 Provides information- Allows producer to
know how much their resources cost and in
turn, how much they should price their
products for. It also can inform consumers
about the relative value of different items
allowing them to budget.
3
SECTION 1
The Price System
5 Benefits of the price system
 Provides incentive- Through changes in price
(increase/decrease) producers and consumers
can be encouraged or discouraged to play their
role.
 Provides Choice- By having prices that could
generate profits for producers, new producers
are encourage to enter the market creating
choices for consumers
4
SECTION 1
The Price System
5 Benefits of the price system
 Provides Efficiency- The price system allows
consumers and producers to communicate
efficiently. Consumers who choose not to buy
products or who won’t buy it b/c the price is too
high are actually helping producers. Producers
will either lower the price or allocate the
resources towards other products so that they
are not wasted.
5
SECTION 1
The Price System
5 Benefits of the price system
 Provides Flexibility- If some unexpected
change in demand or supply were to occur , it
could cause chaos with consumers fighting to
obtain a product that producers cannot supply
enough of. By being able to change the price,
Producers can influence and reduce demand
until a time when they can recover their
production levels.
6
SECTION 1
The Price System
Who is responsible for the cost?
7
 The price system believes that those who
benefit from a good or service should pay for
that product.
 Any costs that a producer must pay is therefore
automatically passed on to a consumer.
 There are some situation where the price
system fails and consumers are not- these
limitations are called market failures.
SECTION 1
The Price System
3 Limitations of the price system
(also called Market Failures:
 Externalities-when individuals involved in
the production/consumer relationship
benefit or are harmed as a result of the
production or consumption
8
SECTION 1
The Price System
3 Limitations of the price system
cont.:
9
 Public Goods
When the government creates a service that it
requires all citizens to pay for such as
national defense or law enforcement even
though not all feel that they benefit. Why?
Because if people could choose not to pay,
the services would not be as effective or
exist at all.
SECTION 1
The Price System
3 Limitations of the price system:
 Instability
Sometimes events cause the price system to
change dramatically causing price to change
that is outside the control of producers and
consumers. For example, how would you
handle a shortage of emergency supplies at a
store in the path of a hurricane?
10