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Prices Convey Information to Consumers and Producers

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Prices Convey Information to Consumers and Producers

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The primary role of prices is to convey information. Consumers and producers use the information to help them make decisions. Ultimately, prices tell producers what consumers want.

For consumers: Price signals the opportunity cost of a purchase. When the opportunity costs of products are high, people handle their money more carefully.

Producers: Use prices to appeal to consumers in hopes of getting them to buy their products.

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Prices Allocate Scarce Resources Efficiently

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Prices Allocate Scarce Resources Efficiently

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Prices guide resources to their most efficient uses.
Example: dairy factories will buy the most milk in order to make the products meet the demand. Guided by prices that communicate what consumers want, dairy producers automatically allocate milk— a scarce resource used to make many different products like ice cream.

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Prices Create Incentives to Work and Produce:

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Prices Create Incentives to Work and Produce:

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Prices in a market-based economy act as an incentive, as they represent potential profit. As prices rise, markets are motivated to produce more. On the reverse side, falling prices are incentives for firms to cut down production. For workers, they are motivated by prices through wages and salaries.

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Prices Allow Markets to Respond to Changing Conditions

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Prices Allow Markets to Respond to Changing Conditions

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Prices allow markets to adjust quickly when major events such as natural disasters interfere with production, creating a problem with supply. When these disasters happen, prices fluctuate a lot depending on what item was affected by that disaster.

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Markets, Efficiency, and Price Signals: Crash Course Economics #19