• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Market Price convey information

Extracts from this document...

Introduction

Market Price convey information Prices play a key role in the market economy. The central problem of economic is to allocate scarce resources efficiently. Prices as a vehicle convey sufficient information to all traders in the market for their economic activities and ensure that goods will be allocated efficiently. There are a lot of transactions between buyers and sellers in the market, individuals pursuing their own self-interest and aim to maximize utility; companies provide goods and services by the aim to make profits, each seeking their own interest. Price mechanism coordinate these transactions and in such a way to make everyone better-off. Market price serves as an "invisible hand" guiding resources to their most efficient uses. First, for the further argumentation, I will explain how prices convey information, namely how price mechanism works. Suppose that, in a small town, for some reason there is an increased demand for potatoes. Retail stores will find that they are selling more potatoes than used to. They will order more potatoes from wholesaler. The wholesaler will order more potatoes from suppliers-farmers. In order to satisfy the increased demand, the wholesaler will pay higher price to induce farmers to plant more potatoes. The higher price is an incentive, so the farmers improve their work efficiency and increase work force to supply the higher demand of potatoes. ...read more.

Middle

For example, the farmers do not need to know why the demand of potato increases. They do not even need to know the demand for potatoes has increased, because those details are not relevant to their decisions about how much to plant. All that is important to them is to know that someone willing to pay more for potato and they will make more profits by supply more potatoes. Based on that information, they have an incentive to plant more potatoes. Third, in the process of information transmission, price mechanism plays an important role to make information efficiency. The people of firm who convey the information have an incentive to take the right action on the basis of that information. The wholesaler is connecting with farmers who can plant potatoes he needs. He is always trying to search out more suppliers who can offer him a lower price. At the same time, the farmers are always trying to find new wholesaler who can pay them higher price or have greater demand for potatoes. In this process, people who have on interest in potatoes will ignore these information Information conveyed by market prices is necessary to use scarce resources efficiency. ...read more.

Conclusion

People who buy the potatoes will never waste it because the price of potatoes is expensive. Therefore it can be seen that the price mechanism serves as an invisible hand which guide people search profit and efficiency. However, sometimes price mechanism can not transmit information correctly; the information may distort by other aspect, for example, government intervention. The government intervene the market system through tariffs and other restraints on various market activities. When the price of a good suddenly rises, people can not judge whether there has an increased demand, because it may be led by government. But we should believe that the government interventions could make everyone better off if government officials had right incentives. In conclusion, prices convey the most important information. The price mechanism plays an allocative role in the market economy, it determines what to produce, for whom to produce it and how to produce it. People can examine the prices of all of the inputs relevant to their production processes, then choose the input mix that produces the output at the lowest cost. In this way, market prices allow producers to react to consumer preferences and put resources to their vest use. Both economic and technical efficiency are achieved which means that not only the minimum wastage of resources but also resources are used to their most valuable use namely economic efficiency. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. Critically evaluate the perceived competitive starategies of the five clothing retail outlets, namely Edgars, ...

    The South African apparel industry has vast export potential. In 1995, world apparel exports totaled $170 billion and South Africa captured less than one percent. South Africa experienced a huge increase in smuggling and fraud which needs to be effectively controlled through customs patrol.

  2. world oil market

    Normal profits are earned selling differentiated products which are similar in nature but to look different by changing some features or advertising it differently. Again there are low barriers to entry. Monopoly: This is when a market is dominated by one company being the sole supplier of a type of

  1. Chinese car market overview. Citroen case study

    CITROEN IN CHINA A) THE HISTORY OB BUSINESS 1987 : Contacting between Citro�n and SAW - The Motor Second Work - (become D�ng Feng Motors), 2nd Chinese trucks producer 1988 : First offer of Citro�n and tests of rolling in China.

  2. The Relevant Market

    the interplay of C & I conditions in other countries and Australia. Output and Unemployment As Gans, King and Stonecash state, "Changes in the economy's output of goods and services are strongly correlated with changes in the economy's utilization of its labour forces".

  1. Scarcity and Unlimited Wants.

    As the firm increases production, eventually average costs begin to rise because: * The disadvantages of the division of labour take effect * Management becomes out of touch with the shop floor and some machinery becomes over-manned. * Decisions are not taken quickly and there is too much form filling.

  2. In the free market system, the demand and supply work and react together. The ...

    where the quantity (Q1) of price is less but the price (Ph) is higher compare with the previous level. After in both cases the equilibrium price and quantity will be defined by demand and supply curves where they intersect each other.

  1. Describe various methods that could be used to prepare a preliminary budget for a ...

    to select an appropriate rate taking into account varying site conditions, specification changes, market conditions, regional changes and inflation. Also it suffers from a lack of precision, and at best can only be a rather blunt tool for establishing general guidelines.

  2. Environmental Analysis Of Landis Lund.

    are trained up to work as service engineers or in the drawing office. If the UK manufacturing industry keeps reducing the way it is, both types of apprentice could become scarce. The craft through outsourcing to low labour countries and the technicians could not be as high calibre as is required.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work