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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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-To consumers, price signals the opportunity cost of a purchase. The opportunity cost of buying any product, remember, is the next best use for the money you spend.

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-Just as changing prices motivate producers, prices in the form of wages and salaries motivate workers. The opportunity to earn a higher “price” can inspire people to enter the workforce or seek higher-paying jobs. On the other hand, low wages can act as disincentives for people to seek work.

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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 wars and natural disasters interfere with the production or movement of goods, wreaking havoc on supply.

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-In each case, price sends a message about products and their intended markets.

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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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-As the incentives-matter principle reminds us, people respond to incentives.
-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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-Perhaps the most important role of price in a market-based economy is to guide resources to their most efficient uses.

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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.