Explaination of the Price Mechanism Essay

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In a perfect economy the price mechanism can give a perfect allocation of resources: what is demanded is produced, changes in demand lead to changes in supply, and the workers move from a dying market to a growing one. Unfortunately, the economy is not perfect. To stop getting to this gorgeous market solution. It only needs one of these elements to be operative and it will be failed the perfect market solution above. In a world where most of products are scarce and people’s wants are unbounded, the allocation of resources is the major concern of the economy. The obvious starting point to analyse this basic problem is the price and its important functions to coordinate the decisions of buyers and sellers in a market economy. The…show more content…
Prices have a signalling function. Price changes send messages to consumers and producers about whether to enter or leave a market. Higher prices is a sign for consumers to reduce demand and as well as a sign to potential producers to enter a market. On the other hand, lower prices give a positive message to consumers to enter a market while sending a negative signal to producers to leave a market, due to they are not making enough profit. For example, a rise in the market of laptops sends a signal to potential manufacturers to enter this market, and may leave another one. As show in diagram B, being the equilibrium price e. A rise in the price caused a shift in the quantity supply curve from s1 to s2. Signalling to suppliers to enter to the market. A shift in the demand curve from d to d1 signals to costumers leave the market to look for cheaper substitutes. An incentive is a fact that motivates a producer or consumer to keep a course of action or to change it. Rising prices give and incentive to existing producers to supply more as it will give them the possibility of more revenue and profits but little satisfaction to consumers. Whereas a low price cut their revenue and give little or no profit to firms but more satisfaction to consumers. As shown in the

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