Please enable JavaScript.
Coggle requires JavaScript to display documents.
Role of Prices in Markets (Signals (Communicate information to the…
Role of Prices in Markets
Signals
Communicate information to the decision makers
Shortage --> Higher Price
Incentive
Motivate decision makers to respond to the information
Increase in price
Consumers
Incentivised to buy less
Producers
Incentivised to produce more as it is more profitable
Rationing
Limited supplies, unlimited wants
Ensures right amt of resources allocated to the production of certain good
Prices serve as signals to factors of production to indicate where they are most needed, and as incentives to encourage them to move into growing industries, and leave declining ones
Consumer Surplus
Difference btw what consumers are willing and pay for a good and what they actually pay for that unit of a good
Demand curve illustrates willingness and ability to pay
Demand curve measures Marginal Benefit = Extra benefit to society of getting one more unit of the good
Producer Surplus
Difference btw revenue producers receive from the sale of a unit of goof and the price at which the producers are willing to make that unit of the good available for sale
Sum of CS and PS
In absence of externalities, the total welfare of the society
Market equilibrium
Demand = Supply
Welfare of society maximised as CS and PS maximised
MB = MC, whereby extra benefit to society of getting one more good = Extra cost to society of producing one more unit of the good
Society's resources are being used to produce the 'right' or 'desired' qty of goods
ALLOCATIVE EFFICIENCY