Price

1. Rationing device

2. Transmitter of information

two major jobs of price

Price as rationing device

because of scarcity, a rationing device is needed to determine who gets what of available limited resources and goods

Price as transmitter of info

often relates to the relative scarcity of a good

Price ceiling

government-mandated max price above which legal trades cannot be made

prevents mutually beneficial trades

• shortages

• fewer exchanges

• nonprice-rationing devices

• buying and selling at prohibited prices

• tie-in sales

if price ceiling is below equilibrium price, the following effects may arise

Nonprice-rationing devices

first-come-first-served

Tie-in sale

a sale whereby one good can be purchased only if another good is also purchased

Price floor

government-mandated minimum price below which legal trades cannot be made

• surpluses

• fewer exchanges

if price floor is above equilibrium price, following effects may rise

Absolute price

price of good in money terms

Relative price

price of good in terms of another good

(absolute price of goodX)/(absolute price of goodY)