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?

When you make your initial post, please fully answer the question and make substantive responses - i.e. at least 400 words that really dive into the topic and show that you've read the text and done research to support your opinions.

Apply appropriate examples that illustrate your points - feel free to bring your workplace experiences into the discussion

You may not use any quoted material even if sources are cited. Please make sure all posts are written entirely in your own words.

Answer 1

Introduction

Economically, we already know, that resources which a nation possesses are limited and have numerous alternative uses. That said, the expectations and demand of consumers are limited. Now, that resources are scarce, it is important to effectively allocate the same, so that an economy can gain maximum as an overall, wherein consumers see maximum satisfaction, while producers see maximum gains or profits.

For allocating resources there are three type of major economies, namely capital economies wherein the forces of demand and supply help in deciding the price and the allocation of resources, socialist economies, wherein the governments decide the price and availability of goods and services and mixed economies, wherein some industries are subject to government control example military and the remaining ones are handled by the private sectors and forces of demand and supply decide prices.

This question, is about the differences between capitalist and socialist economies, and the effects of governments being given the sole right to take necessary decisions.

Case Details: -

Importance of Flexible Pricing: -

The meaning of flexibility in prices means, that the forces of demand and supply help in deciding the prices of goods and services. The need, scarcity and the availability play an important role in this wherein if the demand for a good is higher than its supply, prices remain high and vice versa if supply is higher than demand, prices remain low.

This is also known as a capitalist market wherein the needs and wants of the consumer are maximized and producers maximize their profits.

It is agreed across by economists, that when the forces of market are left independent of one another, it is then that a country gains maximum. This is because competition encourages optimum utilization of goods and services, without which an economy remains backward in the long run.

We have examples of countries such as India and China which in the past have remained closed economies, wherein the government was controlling pricing and these countries hardly saw any growth and had their currencies devalued, loans rising and negligible investment.

They teach us about the importance of having economies wherein demand and supply play a big role in deciding prices. As these economies shifted towards a regime wherein pricing was set by market forces, demand grew and business owners began taking interest in investment, and today these economies are the fastest growing worldwide in terms of growth rates as well as overall welfare and development.

Problems with Governments Deciding on Pricing: -

The key issue with government deciding the prices of goods and services is that it usually comes like a price ceiling or a minimum price for a good or a service which is not an ideal price. It is either too high or too low for the market forces to play a justified role.

Private players, do not have interests in markets wherein government decide pricing. This is because they do not have independence in such market types, and are forced to produce at a rate at which the government wants no matter if it brings them justifiable profits or not.

Also, in these economies, not only the prices but also what goods and services would be produced is determined by the government, giving no control to the private sector. In that situation the consumers always get mediocre goods and products because of which their living standards would remain lower as compared to the world and trade volumes as a result of this also remain extremely low.

We have examples of countries like North Korea which have had government set the prices of all goods and services which are sold in the country. As a result, their economy is subject to price ceilings wherein private sector has no control on pricing of goods. Investments as a result remains slow as producers do not make justifiable profits and innovation is negligible since they have no interest in developing new products, which again may be subject to such policies.

Conclusion: -

We can conclude by saying, that flexible pricing is needed in order to ensure that scarce resources are used in an optimum manner, wherein the profits of a producer and the needs and wants of a consumer can be maximized. When the forces of demand and supply are used to help decide prices, they are set at an optimum level due to competition and the need for satisfying the customer. All major economies across the globe have shifted over to this concept of flexible pricing and have seen maximum innovation, trade volumes as well as global support for one another.

On the contrary, when the government imposes pricing barriers such as ceilings which set maximum prices for goods and services or direct interventions, wherein what goods would be produced are clearly decided, in that scenario, producers find it difficult to be able to make goods in volumes which would give them justifiable profits, consumer demand remains low and competition and investments are also lacking since private players do not anticipate heavy profit margins for themselves.

Please feel free to ask your doubts in the comments section.