Price functions

\ The price system assumes a system of interrelations, since with prices individuals indicate their needs and desires in the economy and therefore allow contributing to the necessary adjustments in supply and demand .

Prices perform two important functions:

1. Rationing goods and services and factors

  • Prices ensure that resources are distributed efficiently and that a market equilibriumcan be achieved .
    • If the demand for a good increases or the supply decreases, there will not be enough supply of the good to cover all the demand, so the price will rise. In this way, demand will be reduced and there will be a market balance again.
    • If the demand for a good decreases or the supply increases, just the opposite occurs, because there will not be enough supply to cover that demand and the price will fall. In this way, the offer will be reduced and there will be a market balance again.
  • Prices will allow buyers to indicate the amount of product they want to buy at each price and entrepreneurs to determine the amount of product they want to sell at each price.
    • If the price increases ( inflation) , companies are encouraged to increase production, since they would obtain a greater benefit and attract new companies.
    • If the price decreases ( deflation), companies will reduce production.

2. Serve as an incentive for entrepreneurs and factor owners

The prices allow companies to obtain money with which they can later pay their production costs (purchase of raw materials , payment of employee salaries, logistics , etc.).

 

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