Question

QUESTION:

Explain why it is important that prices are flexible in our economy? What are the implications if the government started to control prices for products, how would this influence buying?

Answer 1

In our economy,prices should be flexible enough.Firms can gain their capital and production costs back only when prices are flexible.If prices of products are fixed,then firms couldn't meet their expenditure costs during inflation of raw materials.When price rate of raw materials,machinery and labour is high or inflated,then cost of production increases.Inorder to acquire production costs back,firm need to change and increase the cost of the product.Even if labourers demand for high salaries,then firm increases the cost price of product and the income which is gained is given to the labourers.It is not possible in case of fixed prices.If prices are flexibe,companies and factories can decrease the cost of the product and can acquire maximum demand and maximum sales.They can increase cost of the product when there is high demand and low supply for the product.If prices are flexible,people tend to purchase when the prices of products are minimum.This is directly related to the growth of the economy,gross domestic product and national income.Therefore this is why is significant for the prices to be flexible.

Country's economy is effected when prices are controlled by the government.Government might charge either extreme prices, reasonable prices or low prices.In case of extreme prices,consumers are effected badly as they might not be able to purchase products with extreme costs.This decreases the sales and firms might be in losses.Even purchasing power of an individual falls down.In case of reasonable prices,both firms and consumers are satisfied as consumers will be able to purchase the product and even sales of the firm increases.When government controls the prices by charging relatively low prices on products,then firms would acquire losses.If prices are low ,then firm will be not to meet the expenses of the raw materials,production costs,etc.Due to low prices,demand for the goods increases.If the price of product is low then returns of firm tend to decrease.When there are low returns,firm will not be able to purchase raw materials,labour for further production.This decreases supply.So when prices are low,suppy decreases.Problems arise when prices are controlled by government.

When government controls prices of the products,it even influences buying.When extreme prices are set by the goverment,consumers buy less products as it is difficult them to buy products with extreme prices.If government charges reasonable or low prices on products,then consumers tend to buy more products as those products are available at low cost.

Hence,flexible prices are more advantageous.Various things are effected when prices are controlled by the government.Purchases and sales are influenced due to control of price by the government.