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Microeconomics - Essay Example

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The rationing role relates to buyers of the good. A price is useful in rationing the limited quantity of services or goods among the different buyers who would prefer to purchase it…
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Microeconomics
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Microeconomics

Download file to see previous pages... If a consumer does not have a utility for the good that he or she values at least the same as P1, then the consumer will choose not to purchase that good; i.e., that good is never rationed to that particular consumer or buyer. Rationing by price automatically guarantee that a good will only be purchased by a buyers who value it the most (Prusty, 72-74). If a good was to increase in its price, then buyers or consumers would re-evaluate their utility of the good and so abolish those uses with values which are not at least equivalent to the new, higher price of a good.
The second role of price; allocating or sometimes known as signaling, relates to the producers and also resource owners. A higher price of say good X is, in most cases, a signal that the market needs extra output of X and so producers are offered an incentive so as to hire more resources to make X (Samuelson & William, 89-91). Similarly, a lower price for the good X will gesture them to dedicate fewer resources in the production of X. Consequently, in their search for earnings, producers will always respond to changing prices by either decreasing or increasing production as necessary.
The demand for any product or service refers to the quantity that buyers or consumers will be willing and ready to buy at any given price. The supply of goods refers to the quantity which suppliers will be ready and willing to transport to the market at any given prices. An increase in demand for a particular service or product tends to exercise an upward pressure on price. That is, whenever the price of a good increases the corresponding quantity that consumer are willing to buy has also increased.
Therefore, a decrease in demand means that the price of that good was lowered at some point in time. However, if producers act in response by supplying extra to the market this might then ...Download file to see next pagesRead More
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