Economics Today: The Macro View (19th Edition) (Pearson Series in Economics)
19th Edition
ISBN: 9780134478760
Author: Roger LeRoy Miller
Publisher: PEARSON
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Question
Chapter 4, Problem 4.1LO
To determine
:
The
Concept Introduction:
Price System: It is a quintessential foundation of any economic system whereby all goods and services and all factors of production are valued in terms of money. This value is its price and the key factor in the production and consumption decisions in the economy.
Expert Solution & Answer
Explanation of Solution
Answer:
The prices are an expression of consensus on the value of goods, services and factors in the economy. It is a standard measure of value across the globe which is one of the guiding principles of policy decisions.
The price system is called the “Invisible Hand” and is the chief connecting mechanism between the two economic agents (Consumers and Producers) in the laissez faire economy.
The essential features of the price system are:
- It is neutral: The operating principle of the price system is neutrality which implies that neither of the two communicating agents in the economy can determine the prices in isolation and to the exclusion of the other.
- Prices are market driven: The prices are determined by the economic forces of demand and supply. Prices are determined at the point of interaction of the demand and supply curve. This is shown in the figure below:
- Prices are flexible: The prices in the free market determined by the forces of demand and supply are flexible. They respond to the economic fluctuations and serve as the stabilizing economic mechanism.
- Efficiency: The prices ensure efficient allocation of resources until the maximum number of goods and services are sold. The system ensures making the best use of the available resources. This is technical efficiency.
In other words, in determining the prices of goods and services, both producers and consumers interact in the commodity market through the forces of
Any deviation between the demand and supply of the commodity activates the forces of demand and supply and the invisible hand of the market forces re-establishes the equilibrium.
For example: If demand exceeds supply, the prices increases. The increase in the prices reduces the demand and the process of adjustment continues till demand equals supply.
The prices quickly respond to the economic changes through the bidding process by the consumers and producers.
Producing the maximum possible output with the available resources is economic efficiency. The price system ensures both technical and economic efficiency.
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Students have asked these similar questions
An increase of 20 million bicycles demand as a result of a lower p
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. What the heck is this GDP thingy?
It is Thursday afternoon, just a few days before the holiday season starts in your region, and you decided to visit your uncle Chao who owns a local delivery company. While sitting in the living room watching the evening news with your uncle, you heard the news reporter stating the following with an optimistic tone: "According to recent studies, gross domestic product (GDP) is rising due to an increase in consumer spending. The increase in spending was due to an increase in consumer confidence because the job market has shown a positive increase in both employment and income."
Immediately, your uncle Chao looked at you with some confusion on his face and asked:
What the heck is GDP, and why does the news dude seem excited about its increase?
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Chapter 4 Solutions
Economics Today: The Macro View (19th Edition) (Pearson Series in Economics)
Ch. 4 - Prob. 4.1LOCh. 4 - Prob. 4.2LOCh. 4 - Prob. 4.3LOCh. 4 - Prob. 4.4LOCh. 4 - Prob. 4.5LOCh. 4 - Prob. aFCTCh. 4 - Prob. bFCTCh. 4 - Prob. cFCTCh. 4 - Prob. dFCTCh. 4 - Prob. eFCT
Ch. 4 - Prob. fFCTCh. 4 - Prob. 1CTQCh. 4 - Prob. 2CTQCh. 4 - Prob. 1FCTCh. 4 - Prob. 2FCTCh. 4 - Prob. 1PCh. 4 - Prob. 2PCh. 4 - Prob. 3PCh. 4 - Prob. 4PCh. 4 - Prob. 5PCh. 4 - Prob. 6PCh. 4 - Prob. 7PCh. 4 - Prob. 8PCh. 4 - Prob. 9PCh. 4 - Prob. 10PCh. 4 - Prob. 11PCh. 4 - Prob. 12PCh. 4 - Prob. 13PCh. 4 - Prob. 14PCh. 4 - Prob. 15PCh. 4 - Prob. 16PCh. 4 - Prob. 17PCh. 4 - Prob. 18PCh. 4 - Prob. 19PCh. 4 - Prob. 20P
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