[ Post New Message | Post Reply to this One | Send Private Email to Brad DeLong | Help ]

Response to What is the Price Mechanism?

from Brad DeLong (delong@econ.berkeley.edu)
+++++++++++++++++++++++++++++++

When economists use the phrase "the price mechanism," they are referring to the process by which changes in prices guide and shape changes in the value and types of the goods and services that are produced.

Suppose that consumers decide that they want to spend more on VCRs. More consumers show up at stores hoping to buy VCRs. The stores see the higher demand, raise their prices, and also order more VCRs from producers.

Higher profits from making VCRs induces firms to expand production. Higher prices for VCRs curbs demand. Thus the system returns to a stable point with more production and purchase of VCRs, and less production and purchase of other goods.

Thus *prices* act as a *mechanism* that guides the allocation of productive resources--machines and workers--to different sectors of the economy.

Brad DeLong

(posted 8740 days ago)

[ Previous | Next ]