Question

n an essay, discuss the advantages of using prices in the marketplace, as well as the various benefits of a price-driven economy

Answer 1

Prices are indicators of an economy . Firstly they indicate scarcity of a resource or a product in the economy . As for example suppose price of cloth rise in the market , this shows us that demand for cloth is higher than production or supply . So there is a scarcity of cloth in the market . So price makes producers and consumers behave as per conditions of the economy . Lesser people will buy cloth and producers will try to produce more . A sudden upsurge or loweing of price of a particular product also indicates its popularity . Prices help producers to detect trend and preferences of consumers . Sometimes increase in price does not affect demand or rather increase it , showing that the product is highly popular .

A price-driven economy or market economy assures perfect balance of demand and supply . It continuously tries to escalate the economy towards equilibrium . This causes effective usage of factors of production , and no dead weight loss in the economy . It also encourages competition in the market , where producers and consumers are free to go enter and exit the market .