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Prices Allocate Scarcity Resources Efficiently

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Prices Allocate Scarcity Resources Efficiently

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- Prices show companies and producers where to direct their resources.
- Prices guide producers to allocate for a certain product.

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Prices Allow Markets to Respond to Changing Conditions

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Prices Allow Markets to Respond to Changing Conditions

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Prices Convey Information to Consumers and Producers:

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Prices Convey Information to Consumers and Producers:

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Prices Create Incentives To Work and Produce

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Prices Create Incentives To Work and Produce

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- Prices allow markets to adjust quickly when major events happen
- Ex:hurricane, war, drought

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Example of Gas Prices After Hurricane:
- the hurricanes caused gas prices to increase drastically, since supply was low but demand was high
- once the country was recovering, the prices then declined and went back to "normal"

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Ex: Car manufacturers use prices to decide what models to produce and in what quantities

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Incentives Matters Principle: people respond to incentives
- Prices are like incentives because they represent potential for profit. When prices increase, it motivates new and old firms to produce more. When prices decrease, the incentives change and tells firms to cut the production or leave to find better opportunities elsewhere.

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- Conveying important information that consumers and producers can use to help them make the proper decisions.

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example: a firm the produces backpacks might offer a stylish  model at a lower price targeted for preteens that want a new backpack for school.

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Example: Home Prices
- when home prices increase, the production of houses increase
- when home prices decrease, the  production of houses decrease

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When prices increase, it motivates people to seek work and produce more products.
When prices decrease, the prices are like disincentives that make people not want to work.