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Market Price convey information

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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.


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.


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.

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