In this lecture, we will look at some of the roles that prices play in market economies. We will also look at the effects of a much-debated policy option: an oil import fee. Upon completion of this lecture, you should understand and be able to answer these key questions:
1. What are the two main functions that prices perform in market economies? How do they address the three main questions: what gets produced, how are they produced, and who gets the products? How do prices transmit information about changing consumer wants and resource availability?
2. How do prices ration goods? Why must goods be rationed? What are other means of rationing besides price? Are these other methods fairer than using price?
3. If the price of a good is kept below the market price through the use of a government-imposed price control, how can the total cost end up exceeding the supposedly higher market price?
4. How can supply and demand be used as a tool for analysis?
5. How is market efficiency related to demand and supply?
6. What is Consumer Surplus?
7. What is Producer Surplus?
8. When are producer and consumer surpluses maximized?
9. What happens to consumer surplus if goods are over or under produced?
10. What is elasticity?
11. How is the slope of the demand curve related to responsiveness?
12. What is price elasticity of demand and what are its extremes?
13. What happens to total revenue if demand is elastic and price increases?
14. What happens to total revenue if demand is elastic and price decreases?
15. What does the elasticity of demand depend upon?
16. What are other important elasticity measures?