# 7 V - HOW THE MARKETS WORK - PRICES
HOW THE MARKETS WORK
THE EFFECTS OF PRICES
PRICES
CHAPTER CONTENTS
? WHAT IS ¡° PRICE ¡± ?
? EFFECTS ON SUPPLY AND DEMAND >
WHAT IS ¡° DISEQUILIBRIUM ¡± ?
? GOVERNMENTAL ROLES IN CONTROL LING PRICES AND RATIONING = BAD
IDEAS !!
? THE ROLE OF PRICES IN A FREE
MARKET > ADVANTAGES AND BENEFITS
OF A PRICE - BASED SYSTEM
PRICES
WHAT IS ¡° PRICE ¡± ?
IT IS A TOOL FOR DISTRIBUTING AND
RATIONING GOODS AND RESOURCES
THROUGHOUT THE ECONOMY > PRICES
ARE SIGNALS TO PRODUCERS AND
CONSUMERS
WHY DID I USE THE TERM ¡° RATIONING ¡±
HERE ? BECAUSE ALL GOODS AND RE SOURCES ARE SCARCE AND HAVE TO BE
ALLOCATED BY SOME METHOD > PRICES
DO IT BEST !!
PRICES
WHAT IS ¡° DISEQUILIBRIUM ¡± ?
IT OCCURS WHEN THE QUANTITY SUP PLIED IS NOT EQUAL TO THE QUANTITY
DEMANDED
THIS MAY OCCUR WHEN YOU HAVE
EITHER EXCESS DEMAND OR SUPPLY HOW CAN THAT HAPPEN ?? IT IS TEM PORARY , BUT IT DOES
PRICES
HOW DOES THE MARKET FIX
THE DISEQUILIBRIUM PROBLEM ?
AS LONG AS PRICES ARE FLEXIBLE ,
MARKET FORCES WILL NATURALLY PUSH
THE MARKET TOWARD THE EQUILIBRIUM
POINT ( PRICES ARE A KEY TOOL OF
ADAM SMITH¡¯S ¡° INVISIBLE HAND ¡± )
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