Think about our economy Irrespective of economic conditions

Think about our economy. Irrespective of economic conditions, we consume many goods and services in various quantities. There is a constant allocation and re-allocation of resources. How does this happen? What economic mechanism helps allocate resources to the preferences of hundreds of millions of people? (Hint: Consumer\'s sovereignty).

Solution

Solution :

In a free market economy , market prices play the crucial role of conveying vital information about the demand for goods of all diffeent kinds. When the price of something goes up , it signals that there is a shortage relative to the demand of would be buyers. In terms of efficiency of production , it doesn\'t matter whether the shortage is due to changed consumer preference , natural disaster , shortage of materials , or any other reason. The important message producers can profit by making more of it and consumers can save money by using it sparingly until the price comes down at the time of greater availability . Each day hundreds of millions of buyers and sellers automatically send billions of these economic signals. This all pervasive economic feedback mechanism helps adjust production and allocate resources to the preferences of hundreds of millions of people, and this helps in the smooth and efficient running of the free market economic machine .