thousand people want to see the Lou's Crew puppet show at Oakdale
High, but the auditorium only has one thousand seats.
Since the seats are scarce, they have to be allocated,
or rationed among the people who wanted them.
Oakdale High's Student Council want to allocate the tickets
so that they’ll go to the 1,000 people who will enjoy the show
the most. What's
the best way to do this? To
find out, let's explore some different ways of allocating tickets.
come, first served
a price of $2, more than 4,000 people would want to see the
Lou’s Crew show. If
there are only 1,000 tickets, they will go to the people who get
to the ticket window before the tickets are sold out.
This method of allocation, called first come, first
served, is often used to distribute cheap tickets
to rock concerts, sporting events, movies, and many other events.
The first come, first served method
does a fairly good job of allocating tickets to the people
who want to see the show the most.
The people who get tickets to popular events prove their
interest by sleeping on a sidewalk all night or by standing for
hours in a long line. But
the method isn't foolproof.
Sometimes people who desperately want tickets aren't free
to stand in line when the tickets go on sale.
problem with the first come, first served method is that it
wastes time. The
people who stand in line for tickets could instead be doing more
productive things like mowing the lawn, doing homework, or going
to the movies. Standing
in line is no fun for them and useless to society.
Surely there must be a better way to find out who wants the
Another way to allocate the tickets would be to have a
lottery. Perhaps the
people interested in seeing the show could put their names into a
giant box and the first 1,000 names drawn would get the tickets.
Lotteries have been used to allocate tickets to rock
concerts and Olympic events.
Unfortunately, a lottery won't get the tickets to the
people who want them most.
A die-hard Lou’s Crew fan has the same chance of
getting a ticket as someone who’s just looking for a cheap way
to spend two hours.
solution would be to allow only Oakdale High students to attend.
That would have been an example of allocation according to
personal attributes, like age, beauty, intelligence, class, race,
and sex. The personal
attributes method is used to allocate tickets to events like
senior proms and Academy Awards presentations.
As with a lottery, this method won't allocate tickets to those who want
the tickets most, since some Lou’s Crew fans might not be Oakdale High
The tickets also could be allocated by having a competition
for them. Maybe anyone
interested in attending the show could write an essay explaining
why, and the authors of the 1,000 best essays could receive
tickets. Or maybe they
could have a foot race, and the first 1,000 people over the finish
line could receive tickets.
This method is commonly used to allocate goods like Easter
eggs, scholarships, and trophies, but it’s rarely used to
allocate tickets. It's
simply too time-consuming to read essays or organize a contest
every time tickets need to be allocated.
There's also no guarantee that the tickets will go to the
people who want them most. The
tickets may end up going to the fastest runners or the best
way to allocate the tickets is by charging a price high enough so
that only 1,000 people would choose to buy tickets, say $10.
like using price as a method of allocation because it's likely
that the people who are willing to pay $10 to see the show are
going to be very interested in seeing it.
Of course, some rich people might slip in who are only
mildly interested in the show.
And some poor people who are passionate Lou's Crew fans
might not be able to come up with the money.
But allocating by price does a good job of getting
the tickets to the people who are most interested in seeing Lou's
big advantage of price allocation over other methods is that it's
not as wasteful. Instead
of standing in line, ticket buyers can use their time to mow lawns
or baby-sit kids in order to earn money to buy the ticket.
While standing in line benefits no one, mowing lawns and
babysitting is useful and productive.
serve two major functions in our economy.
The first function is to ration or allocate goods
and services (like tickets) among the members of our society.
The second function is to provide appropriate incentives.
we've seen, allocating by price is a good way of getting tickets
to the people who value them the most.
Indeed, prices have so many advantages over other methods
of allocation that we rely on them to ration most of the goods and
services in our economy.
The next time you stroll through a shopping mall or
supermarket, think about how we use prices to allocate the
birthday cards, shoelaces, peaches, and other goods you find
there. By making people pay for these goods, we’re able to get
them to people who value them highly.
The consumers who end up with those beach balls are
generally the ones who want them the most.
year, our economy produces millions of different kinds of goods,
like Valentine's Day cards, CDs, and tarragon vinegar.
Every year these goods are somehow distributed to cities
and towns throughout the United
thing is that nobody coordinates this process. We
have no Secretary of the Economy or Minister of Central Planning
to tell firms what to produce and where to sell it.
Instead, prices guide firms so that they produce what we
want and send it where we want it. If people want more
watermelons, then they will pay a higher price for them.
That higher price tells producers to grow more.
If more motorcycles are needed in
their price there will go up.
This sends a signal to profit-hungry producers to ship more
also use prices to find the least expensive ways of producing
goods and services. There
are many ways for a landscaping firm to mow a lawn, for example.
One way is to have a worker ride an expensive riding lawn
mower with an attachment that vacuums up the grass clippings.
Another is to hire two workers to push inexpensive lawn
mowers and rake the clippings afterwards.
the firm will decide to mow the lawn depends upon the price of
labor and the price of the lawn mowers.
If labor is relatively cheap, then the firm will hire lots
of workers and spend less on machines.
If labor is relatively expensive, then the firm will use
more expensive machines in order to conserve on labor.
also guide resource owners.
You're probably thinking about what you should do after you
graduate from high school. The
salaries of different occupations help direct you to the kinds of
jobs where you are needed most.
Over the next several years, our economy will need a lot
more computer programmers, nurses, and travel agents.
Increasing wages for these jobs will help draw people like
you into these careers. On
the other hand, decreasing wages discourage people from entering
other careers. This is
just as well, since the lower pay usually means that fewer new
workers are needed in those jobs.
that prices are the key to solving the three basic economic
problems presented in Chapter One.
Higher prices mean higher profits, and tell producers what
to produce. In
deciding how to produce goods, producers compare prices of
different resources in order to produce at the lowest cost.
As for who will get them, prices separate those who
are willing and able to pay for a good from those who are not.
it's no wonder that prices fascinate economists. Prices provide
members of our society with the information they need to get the
most out of what they have.
Indeed, economists tend to be very protective of prices,
and often protest when our government attempts to control or alter
work their magic in markets, which are arrangements by which buyers and sellers exchange
goods and services. The word "market" might make you
think of supermarkets, flea markets, and farmers' markets, but
restaurants, Jazzercise classes, and even Coke machines are also
kinds of markets. Indeed, a market need not even have a physical
location to exist. If
you were to sell recipes by mail, you would be creating a market
in which you would never even meet your customers.
some kinds of markets, called auction markets, prices change often
-- sometimes from minute
to minute. Goods like
wheat, lumber, gold, oil, porkbellies, stocks, bonds, and
livestock are sold in auction markets like the
commodity markets and the New York Stock Exchange.
You can keep track of prices in auction markets by
exploring the financial pages of most major newspapers.
markets work behind the scenes in our economy, supplying raw
materials to producers, who in turn supply their goods to
consumers through retail markets. The Oscar Mayer Corporation, for example, buys
enormous quantities of porkbellies on the Chicago Mercantile
Exchange, then processes them into packaged bacon that
of the goods that you buy in retail markets -- like bacon -- have prices that are not changed regularly.
It's easy to see why a retail store would be reluctant to
change prices too often. Price tags, menus, and price lists would
have to be replaced each time.
Customers also might become annoyed and seek out other
stores with more stable prices.
even retail prices are subject to change.
Stores often have sales in which they mark down the prices
of goods that have been selling slowly.
And the prices of high-priced retail goods -- like
cars and furniture -- are often negotiated.
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