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Prices Overview

Prices Overview. Price System. Prices can provide information (peanut butter vs. wine) Price system produces incentives that can lead to efficiency Allocative efficiency: P = MC (MC ≈ social opp’y cost) Productive efficiency: P = min ATC

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Prices Overview

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  1. Prices Overview

  2. Price System • Prices can provide information (peanut butter vs. wine) • Price system produces incentives that can lead to efficiency • Allocative efficiency: P = MC (MC ≈ social opp’y cost) • Productive efficiency: P = min ATC • Not just in goods and services but in factors of production (labor markets): pay for productivity efficient allocation of resources/behavior • Agriculture Industry Services • Wall Street vs. Main Street? • The price system, as opposed to command economies, facilitates choice and flexibility • However: search and menu costs • “Jingle All the Way” and Gas station billboards • Internet?

  3. Violating the Law • Price ceilings: maximum prices • Price floors: minimum prices • If equilibrium price is a black hole in the middle of the room, “floors” are on the ceiling, “ceilings” are on the floor • Floors are set above equilibrium, ceilings are set below • If floor below eq. or ceiling above ineffective

  4. Graphs, Impacts, and Examples • NOTE: Surplus (bad) does NOT equal consumer/producer surplus (good) • Minimum wage laws • Rent control • Politics vs. economics

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