In this essay, I would like to analyze the kinds of information market prices convey and why this information is important for the efficient allocation of scarce resources.
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Introduction
In the modern world, the world economy is a mixed economy of which free-market economy is the greater part. The price system is a fundamental and significant mechanism of it. It is the price system that enables people living all over the world to cooperate while each one goes after his own interests. That is because everyone goes about his own business with the information he gets, and in standard models, information is only transmitted through market prices. So it is very clear that, in current economy, market prices have a very particular informational role. In this essay, I would like to analyze the kinds of information market prices convey and why this information is important for the efficient allocation of scarce resources. First, let me take a true thing for example. In 2001, the conference of APEC was taken place in Shanghai. Besides the contents of the conference, it was very interested in by the reporters that all the government leaders from different countries who attended the conference wore the clothes in the style of Tang Dynasty. After the conference, in became a fashion to wear the clothes of this style in China, even all over the world. ...read more.
Middle
That is because the supply of papers is in shortage, so people have to pay more to get papers. On the other hand, if there are more papers produced, the prices will surely go down. Supply is the total amount of a good or service offered by the producers at a given price over a period of time (lecture note). As the supply curve shows, there is a positive relationship between the supply of a product and its price, while other things do not change, if its price rises, the supply will increase. That is because the only objective of producers is to make profits. The rise of the price means a greater possibility of making greater profit, so the existing producers will produce more and news firms will be interested in joining this market where there is an increased profit opportunity. Of course, there are some other determinants of supply such as profitability of alternative products, profitability of goods in joint supply, natural factors, aims of producers and expectations of future prices (lecture note). As the same as demand, the information about the change of supply can only be transmitted through the change of prices. ...read more.
Conclusion
What is more, they will try to find new technologies that can help reducing the amount of copper used in each production or other materials to take the place of copper in production. Just take the first example given above one step further. If the demand of that particular clothes increases, and the demand of Western-style clothes decreases, then the producers will employ more workers to produce this first kind of clothes, and where are these workers from? They are probably from the department producing Western-style clothes. This is called "shift of labor". And the producers will also increase the input in producing the clothes of Tang Dynasty to buy more machines, train new workers and any other things that can be called "capital" in all. On the other hand, they will spend less in other productions. As a conclusion, what I want to say is prices is the only way to transmit the information in market. It is not perfect as the market is not perfect, but it is the best way through which people get information and allocate the scarce resources efficiently. What people should do is try to make prices expressing freely the condition of demand and supply. ...read more.
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