Hardware stores charge higher prices for snow shovels after a big snowstorm. What role do prices play in the snow shovel market?
What will be an ideal response?
Prices allocate scarce resources (such as snow shovels after a big snow storm) to the consumers who value snow shovels the highest. Thus prices play an important role in the maximization of social surplus. Prices in this case will also increase producer surplus (i.e, the hardware stores are better off as a result of the higher prices) but may decrease consumer surplus (i.e., consumers are worse off as a result of the higher prices). The higher prices also provide an incentive for hardware stores to try to acquire more shovels to sell and to hold a large inventory of snow shovels at the start of the winter; these decisions will increase social surplus.
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