Question

Analyze why it is important that prices are flexible in our economy. Explain why a shortage might be present at a store and how would a manager be able to solve for this problem.

Answer 1

Prices control the natural process of supply and demand and it ensures that free markets has the goods that people want at a fair price that reflects its values. If a good has a high demand consumers will bid for a higher price which will convince producers to produce more of the good. If there is more of the good that people don’t require, the opposite will happen. When prices certain goods are fixed, it can cause artificial shortages, and producers would be reluctant to work to produce those goods that are not priced fairly.

A higher level price or lower level might temporarily increase or decrease in real production, however for the long-run, resource prices adjust and full employment production is maintained. If prices are not flexible and prices of other goods does not decline and the wages do not adjust, market does not return to the its original full employment equilibrium level.

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