http://wallstreet2u.com/economics/what-are-the-different-functions-of-price-in-the-economy Your source of financial news, bringing wallstreet to the mainstreet masses Wed, 23 Sep 2009 11:52:27 +0000 http://wordpress.org/?v=2.9.2 hourly 1 http://wallstreet2u.com/economics/what-are-the-different-functions-of-price-in-the-economy/comment-page-1#comment-1856 Hans C Tue, 01 Sep 2009 16:23:16 +0000 http://wallstreet2u.com/economics/what-are-the-different-functions-of-price-in-the-economy#comment-1856 I'd say price has ONE function, but serves several purposes. Prices are there to ensure that supply equals demand for any product or service. This is useful for several reasons: (1) it limits the demand of scarce products or commodities to sustainable levels -- which would otherwise have had to be done throught inefficient rationing schemes; (2) in case of scarcity the price signal induces producers to increase their capacity because rising prices means rising profitability; and (3) relative price changes send important signals to decision makers about changing preferences -- which would otherwise (think Soviet Union!) have had to be handled through incredibly cumbersome planning procedures. I’d say price has ONE function, but serves several purposes. Prices are there to ensure that supply equals demand for any product or service. This is useful for several reasons: (1) it limits the demand of scarce products or commodities to sustainable levels — which would otherwise have had to be done throught inefficient rationing schemes; (2) in case of scarcity the price signal induces producers to increase their capacity because rising prices means rising profitability; and (3) relative price changes send important signals to decision makers about changing preferences — which would otherwise (think Soviet Union!) have had to be handled through incredibly cumbersome planning procedures.

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