Rationing Black Market Economies The Problem of Scarcity

Rationing & Black Market Economies

The Problem of Scarcity • Scarcity - Limited quantities of resources to meet unlimited wants. • If goods are scarce, they must be rationed. – Rationing is a system of allocating scarce goods and services according to certain criteria. • Ex. Physical prowess, public esteem, age, need, merit, willingness to pay money, etc.

Competition and Price • Competition is the natural result of scarcity. – Individuals striving to meet the criteria used to ration goods. • Price - society rationing on the basis of a willingness to pay money. – Individuals will work to earn money and those that are able and willing to pay the price will receive the good.

Price as a Rationing Device • When goods are in short supply, consumers compete against each other to obtain the good. – In a market economies the result of this competition is an increase in price; – Price serves as an important rationing device in market economies and a signal for economizing. • What happens when price controls are implemented?

Other Rationing Methods • When prices are fixed, an economy must develop another way to ration scarce resources: – Need – First come, first served – Lottery, equal share for all – Merit Can you think of any others? ?

What is a black market? • Black Markets - A market consisting of all commerce on which applicable taxes or regulations are avoided. – A black market can consist of either… • Legal goods sold at illegal prices • Illegal goods – Black markets often develop when price controls are implemented

How do Price Controls Lead to Black Markets? • Effects of Price Ceilings: – Demand by consumers will increase; – Seller’s profits decrease; – In order to maximize profits, sellers will reduce supply; – Shortages result; – Consumers who are willing and able to pay a higher price for the good will find a way to obtain it on the black market.

Black Markets cont… • How do black markets affect the supply of goods? – Consumers who are willing/able to pay will move into the black market; – Demand for the good will increase along with the black market price; – Suppliers will divert more of the product onto the black market in order to make more money; – Shortages will be exacerbated in the legal market.