4.7 WHY IS PRICE IMPORTANT? Households and businesses can use price information

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4.7 WHY IS PRICE IMPORTANT? Households and businesses can use price information effectively from markets. The relative wages of different occupations help people determine their career paths. Consumers often compare the prices of different goods and services and makes purchases that maximize her utility. If the prices of some products change over a period of time, a consumer will likely select a new combination of products to purchase. If the price of a product seems too steep compared to the marginal utility received, then she may decide not to purchase it. However, she might instead attempt to earn additional income from the labor market in order to afford the product. Prices are a key element in decision making for individual consumers, and business firms are no different in their reliance on price information. Two sets of prices guide businesses to produce goods and services with the most efficient use of resources. First, the firm must decide what and how much to produce. Demanders express their preferences by their willingness to pay. If demand is great enough, then the price of a product will rise relative to other goods and services. A greater relative price signals firms that it is sensible to produce and sell more of the product. The firm consequently uses a second set Economics What You Need to Know: 18 of prices to determine which specific types of resources should be employed to produce the product for market. Higher priced resources that are not very productive are avoided, while lower priced resources with greater capability are utilized foremost. The combination of resources employed depends upon the relative prices in conjunction with their productivity. Most businesses experience the pressure of operating in competitive markets. This tends to assure that they will normally direct scarce resources to produce what consumers value most. The market system relies on millions of decision-makers -- consumers and firms. What is remarkable is that both buyers and sellers must stand to gain if a market is to be found. This mitigates the conflict that self-focused people experience in a world of scarcity; not necessarily perfect but markets often tend toward economic efficiency

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What you need to do is insert specific statements on principles that are covered in this chapter 4.7. The chapter titles are questions, but this assignment does not involve answering the entire title question. Instead it involves presenting one principle that is learned in a section. Together, with many postings over different sections by various students, the principles within each section of the chapters are flushed-out.

Explanation / Answer

Price is important but on a broader prospect information is more important. Information is the ley to make decision which is beneficial to the decision maker. However, there are siyuations when 'asymmetric information' comes into play where one party may have detailed knowledge in comparison to the other party. In such cases, he could gain much more than disadvantageous party.

Then this is also the fact that to collect vast information is time consuming and impossible because of its dynamic charactristic. Adam Smith proposed his theory in 1774 book, 'Wealth of Nations'. He mentioned 'invisible hand' concept in that book. He said that if everybody in the society will act for his or her benefit then outcome will be overall welfare for the society. Economics is all about allocation of scarce resources for efficient output. In this requirement 'invisible hand' theory seems to be perfect solution and above paragraph accentuate it.

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