Explain why it is important that prices are flexible in our

Explain why it is important that prices are flexible in our economy? What are the implications if the government started to control prices for products, how would this influence buying?

Solution

When the prices are negotiable between the buyer’s and seller’s and allow for bargaining within a certain range this method of selling are said to be Flexible Pricing Method of selling.

Importance

when government adopts a price control, it defines the market price of a product and forces all, or a large percentage, of transactions to take place at that price instead of the equilibrium price set through the interaction between supply and demand.

When the price is too high, there is an excessive amount of the product for sale compared to what people want. Government then exacerbates this situation by continuing to purchase the excess crop at the set price.

In Government price controls, serious welfare loss results because not enough of the good is sold. The wasted chance to create both producer and consumer surplus from those sales is known as ‘deadweight loss’ because it is income that is lost forever.

If government prevents firms from competing over price, firms will compete on whatever dimensions are open to them.