What is it about the Market and its pricing system that brings the most efficient allocation...

What is it about the Market and its pricing system that brings the most efficient allocation of goods?

Expert Solution

It is the competition among the buyers and the sellers that brings the efficiency in allocation of goods and services. Competition also results in reducing the cost of production to its minimum, thereby achieving the product efficiency. Buyers and sellers enter the market and engage in bargaining over the price for a given unit of goods and services. The market forces of demand and supply work together to determine the equilibrium in the market. The price at this equilibrium is acceptable to both buyer and seller.

If due to any discrepancy or external shock, there is a price that does not equate the quantity demanded and quantity supplied, market forces of demand and supply start working, in order to bring the price towards the equilibrium. If the market price is greater than the equilibrium price, competition among sellers would bring the price down. If the market price is less than the equilibrium price, competition among buyers will increase the price up. Therefore, the price mechanism always brings the market at equilibrium.

Rahul Sunny answered 1 year ago

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