How does price organize production?

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pohnpei397 eNotes educator| Certified Educator

We can say that price organizes production in a market economy because prices tell business what to produce and how to produce it.

In a market economy, prices send signals to firms and to individuals. When the price of a given product is high, that signals people to make more of the product.  It lets them know that they can make high profits if they produce that good or service and so they do so.  Conversely, if prices are low, it signals people to stop making that product.  The low prices tell producers that consumers do not want that particular product.

In a market economy, prices also send signals about how to make products.  For example, if prices are low, it might be a signal to try to find cheaper ways to produce your good or service.  The price tells you that you have to change your methods so that you can become more efficient.  If the prices remain high, there is not that kind of pressure on you to find better production methods.

In these ways, prices organize production.  They send signals about what consumers want so that firms know that they should produce more of those goods.  They send signals telling firms that they need to change the ways in which the produce things so as to become more efficient.  Thus, prices tell producers what to make and how to make it, which is one way of defining “organizing production.”

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