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The Working Of A Price System In An Economy

Consumers have a variety of unlimited material wants. Possessing a limited many income derived form the sale of limited amount of resources at their disposal, each household seeks to purchase that combination of goods and services which will give it the greatest satisfaction. These various consumer wants in effect are tallied on the demand side of the consumer wants in effect are tallied on the demand side of the product market. The demand schedule for each product is down sloping, because consumer find it to their advantage to substitute own-priced products for high-priced products. Because of the large number of consumers buying each product, no one actually influences product prices.

Competing business institutions stand on the supply side of the product market. Their goal is to maximize profits. In doing so they must decide what product will be most profitable to produce. And what combination of resources will produce the desired output at the least cost. For the business sector as a whole, these decisions, which in effect indicate the willingness of businesses to produce and after various products, are reflected in product supply curves. These supply serves are up sloping, indication that other things being equal businesses will probity substituting the production of the high-priced to the production of the low-priced goods. Together with the product demand curves which mirror consumer preferences,  these  supply curves will establish an  equilibrium price for all  those products which consumer might want and which businesses might be willing to supply.

Business requires resources in accomplishing production. Businesses might try to minimize their costs and, other things being equal, maximize their profit by substituting low-priced resource for high-priced resources. This means that resource demand curves will be developing to communicate to resource suppliers how much of each resource businesses will be willing to employ at various possible resource prices.

Finally, households as resource suppliers offer the land, labor, capital, and entrepreneurial talents which they own to businesses. The decisions of competing resource suppliers are reflected in resource supply curves which are generally up sloping, reflecting the fact that households seek the greatest return form the sale of their resources. The up sloping nature of these curves of supplest the households not only want, but within  limits are able to shift resources form low-paying to high-paying glens of employment.

In brief, the product demand intentions of households and the product decisions of businesses will determine seers of product prices. Similarly, the resource demand decisions of businesses and the resource supply decisions of the households will establish a series of resource prices.

Economic Choices Based on Scarcity and Substitutability:

The above picture of the price system envisions a series of inter-related choices on the part of households as consumer and resource supplier and businesses as producers and resource user. These choices problem of making economic choices because resources are scare. If resources were infinite and abundant in relation to the demand for them, the economizing problem will dissolve in a sea of affluence. Consumer swill not has to choose form among various products. Abundance would make it possible goods and services he service. The same would be true for businesses to carry on production.

But unfortunately, this is like describing and economic utopia, and not economic reality. IN real life, resources and therefore products are relatively scarce. Hence consumers with money income limited by the sale of their scarce resources with money income limited by the sale of their scarce resources are forced to choose form among relatively scarce commodities. And businesses possessing limited money receipts form the sale of relatively scarce products must choose form among scarce resources in carrying on their productive efforts. Indeed, the presence of the basic theme of scarcity, in our picture of the price system is mirrored in the very fact that products and resources have price tags on them. Only when something is scarce n relation to its demand, will it command a price in the market.

How does substitutability come into the market?  Within limits, both resources and products are versatile. Consumer wants can usually be satisfied with various goods. The want of trip form New York to Chicago can be satisfied by purchasing a car or train ticket, a plane ticket, or a bus ticket. Hunger can be satisfied by a wide variety of foods-a bowl of rice, hamburger or a piranha. And so it is with producing specific products. Resource dictated by technology within limits, are substitutable for one another. Various resource combinations can be employed for the manufacture of most products. The nature of both the supply and demand choices in a market economy is strongly influenced by substitutability. The demand curve for product is down sloping because the customer wills substitute other products for any particular product whose price happens to rise. And producers tend to substitute alternative resources for that product. Producers tend to substitute high-priced for low-priced products for formulating their production intentions. Resource supplier also shifts their human and property resources and more of less scarce ones. By substituting the society conserves most of these products and resources which are most scarce. Now with the point-in-time picture of the price system clear to us, and with the significance of scarcity in mind, let us examine the meaner in with the competitive price system works.

Competitive Pricing:

Though the price system is th eorgnsiing mechanisn of pur capitalism, it is necessary to recognize the role of competition as the mechanism of control in such an economy. The market mechanism of supply and demand communicates the wants of consumer (society) to businesses and trough businesses to resouce supplier. It is competition, howver, which forces businesses and resorce suppliers to make appropriate responses. To illustrate the impact of an increase in consumer demand for some product will raise th egood’s price above the wages, rent, inters, and normal profit costs fo production. The resulting economic profits in effect are a sinal to producers that society wants more of this product. It is competition-particularly the ability of new firms to enter the industry –that simultaneously binges and expansion of output and a lowering of price back to the level just consistent with production costs. However, if the industry was not competitive, but dominated by one huge firm, which was able to prohibit the entry of potential competitors. Then than firm could enjoy economic profits by pointing the expansion of the industry. But competition does more than guarantee responses to the wishes of society. It is competition which forces firms to adopt the most efficient production techniques. In a competitive market the failure of some firms to use the least costly production techniques means eventual elimination of other competing firms who do employ the most efficient methods of production. Finally, even that competition takes place which is conducive to technological advance. A very remarkable aspect of the operation and the adjustment of competitive price system are than at curious and important identity is involved-the identity of private and social interests. The is, firms and resource suppliers, seeking to father their own self-interest and operating within the framework of a highly competitive market system will simultaneously, as though guided by” an invisible had” promote the social or public interest. For example, we have seen than given a commutative environment, business firms use the least costly combination of resources in production given output because it is in their self-interest to do so. To act otherwise would be to forego profits or event risk bankruptcy over a period of time. But at the same time it is obviously also in the social interest to use scarce resources in the least costly, that is, in the most efficient manner. TO do otherwise would be to product a given output at a greater cost or sacrifice of alternative goods than ties really necessary. Furthermore, there is the phenomenon of substantiality that often prevails in the production market.

Is the price system the best means of how total output is to be determined, how production of that output. Should be organized and how total output should be distributed? This is a complex question. Any complete answer necessarily leaps the boundary of facts indenters the realm of values. The basic economic argument of the trice system is that it leads to an efficient allocation of resources. The competitive price system, it is argued, guides rouses into the production of those goods anserine most wanted by the consumers.