Overview
Purpose:
To help viewers understand the forces that affect prices, the way prices act as signals to consumers and producers, the cost of interfering with free-market prices, and the circumstances that justify interference with the free-market.
Objectives:
1. People are motivated to buy and sell goods and labor services by their desire to improve their well-being.
a) Consumers purchase products and services to maximize their well-being.
b) Producers supply these products and services in a manner that maximizes their profits.
2. Prices are the mechanism that provides information and incentives to buyers and sellers
a) Prices tell producers how much they can produce at what profit.
b) Prices indicate to consumers how much and what they can buy with their income.
c) The market balance occurs at a price where the separately formed plans to buyers and sellers mesh so that the quantity demanded (at a particular price) and the quantity supplied (at that price) are the same.
d) This equilibrium point encourages the efficient allocation of resources.
3. Interference with the natural market forces through the imposition of price controls, rationing, quotas, etc., can lead to an inefficient allocation of resources.
4. There are circumstances in which market intervention may be justifiable.
a) Markets may exhibit unstable price behavior.
b) Market forces may hurt the economically disadvantaged.
c) Markets may not respond quickly enough during national emergencies.
| Key Economic Concepts economic efficiency, equilibrium, allocation of resources, supply curve, price controls, demand curve, rent controls competitive price system, productive resources, invisible hand. |
| Contemporary Issues Some communities still have rent control programs. These programs are usually justified on the grounds of protecting poor and elderly renters from steep rises in rents, especially during real estate booms when both residential prices and rents tend to rise very rapidly. However, landlords often react to such a situation by allowing rent-controlled properties to deteriorate and by not investing in new rental units that would fall under a rent control program. In circumstances like this, real estate tax collections by the government can also be adversely affected. Are there other ways in which governments can help low income renters without incurring the high costs associated with rent control? |
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