Prices play an important role in efficiently allocating resources in a market economy. Prices act as signals to producers and consumers, adjusting to surpluses and shortages. Without prices, the government would need to directly decide allocations through rationing, which is costly and less effective. While prices benefit both buyers and sellers, government policies like price ceilings and price floors can disrupt markets and create unintended consequences such as shortages or surpluses. Agricultural price supports aim to stabilize prices for farmers but may distort the market.

1. Chapter 6: Prices and Decision Making

5. Surplus – quantity supplied is greater than quantity demanded - Will drive the price down. Items will go on “sale”. Shortage – quantity demanded is greater than quantity supplied - Will drive the price up. Equilibrium price – price where quantity supplied is equal to the quantity demanded Surplus Shortage