The Price System :: essays research papers

The Price SystemThe expenditure dust is a mode of organizing economic activity. It does this by coordinating the decisions of consumers, divulgers, and owners of productive resources. Millions of economic agents who have no direct communication with each other atomic number 18 led by the price corpse to supply each others wants. Every economic system has three functions. In a decentralized usually private endeavour economic system, the price mechanism is the instrument by which these functions argon performed.Prices atomic number 18 an expression of the consensus on the values of different topics, and every society that suffers exchanges among consumers has prices. Because prices atomic number 18 expressed in terms of a widely acceptable commodity, they permit a comparison of the comparative values of various commodities--if plaza are $15 per pair and bread 30 cents per loaf, a pair of shoes is worth 50 loaves of bread. The price of anything is its value in exchange for a commodity of wide acceptability, money.A system of prices exists because individual prices are associate to each other. If, for example, metal rods cost 40 cents a pound and the surgical procedure of drawing a rod into outfit costs 25 cents a pound, then, if the price of wire exceeds 65 cents, it depart be profitable to produce wire and if the price of wire falls below 65 cents, it will be ruinous to produce wire. Competition, therefore, will hold the price of wire about 25 cents per pound above that of rods. A variety of such(prenominal) economic forces ties the entire structure of prices together. One function of the price system is to determine what is to be produced and in what quantity. Even an ancient miserliness must(prenominal) choose between food and shelter, weapons and tools, priests and hunters. In a modern economy the potential variety of goods and services that may be produced is immense. Consider alone the 10,000 new book titles that are published each year o r the hundreds of colors of paint or the thousands of styles of clothing that are produced--each of these actual collections macrocosm much smaller than modern technology permits.The second function of the price system an economy must perform is to decide how the desired goods are to be produced. There is more than one way not all to skin a cow but also to grow wheat, germinate lawyers, refine petroleum, and transport baggage. The efficient production of goods requires that certain obvious rules be followed no resource should be used in producing one thing when it could be producing something more valuable elsewhere and each product should be made with the smallest possible amount of resources.