Question

According to Hayek’s article “The Use of Knowledge in Society,” what is the fundamental role of prices in the economy? Why does Hayek use the word marvel when he describes the price mechanism? What happens when prices are determined by the state rather than by the interaction of many buyers and many sellers in the marketplace? Discuss the differences in allocative efficiency between a capitalist and a socialist economic system as they relate to the price mechanism in each system.

Answer 1

According to Hayek’s article “the use of knowledge in society”, the fundamental role of prices in the economy is ----price is the deciding factor in the market economy where all the things roll around the price.
Hayek use the word marvel to express the stable units of the price in the market because price mechanism can only be establish when there is an specific pricing are there in the market
When price are determined by the states rather than by the interaction of many buyers and many sellers in the marketplace then there is a situation of excess demand or excess supply in the economy because equilibrium price can only be establish when there is an interaction of demand and supply in the economy.
The differences in allocative efficiency between a capitalist and a socialist economic system are as follows if they relates to the price mechanism.
In the capitalist economic system the price is determined with the help of intersection of demand and supply in the economy.
In the socialist economy system the price is determined with the help of the state decision or the government decision.
In the capitalist economy main objective is to earn profit.
In the socialist economy main objective is the welfare.