Economics Part 2: Prices

The most basic and simple principal in all of economics is as follows:


People buy more at lower prices. People buy less at higher prices. Producers produce more at higher prices. Producers produce less at lower prices.


In a market price coordinated economy, prices guide consumers and producers to where goods are most valued. This is the reason that these type of economies have a much higher standard of living than countries that are coordinated by a central planner or some kind of command economy like North Korea, Cuba, or the Soviet Union of the past.

Prices are not a good or bad thing. Prices simply convey information to both consumers and producers. The most important information that prices convey are how scarce resources are. When prices are high that usually means that that resource is very scarce and not a lot to go around. Thus beach front property is highly expensive because there is far more people wanting to live on beach front property than there is room available. Some might complain that this means that only those who are "rich" can afford the most scarce products. To an extent that might be true. But at the same time under non-price coordinated economies the leaders of the country make those decisions. I'd much rather trust markets than some super powerful leader who has the power to tell me what and where and how much of something I can have.

Furthermore, due to beach front property being highly price, most individuals cannot afford this property and thus hotels and rental property is often built there allowing society to have an opportunity to enjoy this property instead of an individual being able to afford it to him or herself.

Prices convey information that resources are very limited but they can also convey the message that this good is readily available. Computer prices have fallen in recent years due to the fact that the resources are readily available and much cheaper than they use to be because of this fact. Without the mechanism of prices, people would buy too much of an extremely scarce resource and prices might not convey the information that this item is now readily available to people that it use to not be available to at an affordable price.

More on prices role next time