Question

COMMUNICATION, MOTIVATION AND COORDINATION, employs a specific mechanism or catalyst to accomplish its function. Using the guideposts to economic thinking that are discussed in Chapter 1, explain how the market system efficiently (improves the status quo, makes everyone better off) performs each function of communication, coordination and motivation in its role of employing scarce resources to meet the needs of consumers.

Answer 1

Any efficient mechanism performs the functions of communication, coordination and motivation properly. If these 3 important functions are not performed well then management of scarce resources does not lead to optimal allocation.

In this context  market mechanism performs these functions in a way that scarce resources are allocated to meet the needs of consumers. The following points explain it -

1.Communication - Virtual or physical markets communicate prices, discounts, demand, availability  etc of goods and services from varoius sellers through sales agents or customer support services. Here markets place contains information that enables price discoveries of goods which are first placed in markets. Proper communication channels also lead to product innovation and improvement which can raise standards of living. For example, Artificial intelligence powered devices optimize electricity consumption by switching off power when devices are not in use.

2. Coordination- Outcomes in one market has spillover effects in markets for related goods or nearby geographical regions. So markets sends signals which guide sellers in making decisions about production and investment in current as well as future periods. Also it guides buyers to frame their preferences and adjust their budget in response to price signals. Therefore markets facilitate trade by enabling common ground where exchange of goods and services can take place smoothly. For example if prices of movie tickets rise people substitute by renting DVDs etc. Further price signals drive out arbitrage opportunities overtime as information is disseminated to many sellers.

3. Motivation- One of the economic principles states that people respond to incentives. If Govt declares subsidies or announces duties free on certain commodities, or sellers conduct sale events where commodities are sold at attractive discounts or banks offering interest free credit - all these incentives motivate consumers and producers to participate actively in market system.