Author:  Lori Alden

 

              Several 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.

 

        First come, first served  

            At 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.

            The 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 tickets most.

 

        Lottery  

     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.

 

        Personal Attributes  

            Another 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 students.  

 

        Competitions  

     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 writers.

 

        Price  

            Another 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.  

            Economists 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 Crew.  

            A 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.  

 

The functions of prices  

            Prices 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

 

        Allocation  

            As 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.  

 

        Incentives  

            Every 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 States.  

            The surprising 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 Nome, then their price there will go up.  This sends a signal to profit-hungry producers to ship more motorcycles there.  

            Firms 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.   

            How 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.  

            Prices 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.   

           Notice 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.  

            So 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 them. 

 

Markets  

            Prices 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.  

            In 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 Chicago 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.  

            Auction 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 supermarkets sell.  

            Most 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.  

            But 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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