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How markets and
prices allocate
resources
- The Function of Prices
- The Signalling Function
- Prices signal
what's available
- information conveyed allows traders to plan
and coordinate their economic activities
- information conveyed allows traders to plan
and coordinate their economic activities
- If prices signal wrong or misleading
information markets will function
inefficiently, sometimes breaking
down completely
- Prices signal
what's available
- The Incentive Function
- Prices create incentives
for economic agents (e.g.
households and firms)
- the incentives make them behave
and make decisions in ways that
should fulfill their self-interest
- the incentives make them behave
and make decisions in ways that
should fulfill their self-interest
- Prices create incentives
for economic agents (e.g.
households and firms)
- The Rationing function (or allocative function)
- the changing prices of goods and services
relative to each other allocate and ration
the economy's scarce resources
- they are given to the consumers
and firms who are willing and
able to pay most of them
- they are given to the consumers
and firms who are willing and
able to pay most of them
- the changing prices of goods and services
relative to each other allocate and ration
the economy's scarce resources
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