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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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Prices signal whether the supplier is in shortage or has a large mass of whatever products are being sold. Prices are also used for producers to appeal to consumers they hope will buy their product.

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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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Rising prices in a market motivate existing firms to produce more, and they encourage new firms to enter the market. Falling prices, in turn, serve as incentives for firms to cut back on production or even to leave a market to look for better opportunities elsewhere.

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Prices Allocate Scarce Resources Efficiently

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Prices Allocate Scarce Resources Efficiently

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Guided by prices that communicate what consumers want, dairy producers automatically allocate milk—a scarce resource used to make many different products—to its most valued use. Or consider the earlier example of car manufacturers who use prices to decide which models to produce and in what quantities. These production decisions are, at bottom, decisions about how best to use limited resources.

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Price Allows Markets to respond to changing conditions

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Price Allows Markets to respond to changing conditions

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Certain conditions such as hurricanes, tornados, etc. can effect the prices of certain products such as food, gas, or water. For example y throwing the gasoline market into disequilibrium, Hurricanes Katrina and Rita illustrated the key role that prices play in correcting both shortages and surpluses.Prices give markets the flexibility they need to reach equilibrium even under changing conditions.