February 28, 2015

Homework Help: microeconmics - role of price

Posted by Dballer on Tuesday, November 7, 2006 at 2:54am.

What exactly are the roles of price in a market economy?

Is it measure of value, store of value, currency for exchange, price determines quantity demanded?

What else should I add to this list? Any ideas?
Kind regards,
Mr McHautenson

It give information about the consumers preferences.


Your list shows the roles of money in a market economy. Not so much the role of price.

Fundamentally, price becomes a measure of opportunity cost for consumers, as well as producers. Price is the exchange rate between thems that want to buy and thems that want to sell. So, price acts as a signal for people thinking about buying or thinking about selling.

Ah, yes, I was thinking my list had to do more with accounting and not microeconomics. Thanks for pointing that out dear sir.

So price being an exchange rate between consumers and producers is the only role of price in a market economy? Is that it? (I'm think it must be it as it is for market).

Please let me know your thoughts,
yours sincerely,
Mr Mchautenson

Price is also a signal. Price indicates what a new producer can expect to receive or what a new consumer can expect to pay.

Prices are components in measures of value. So, for example if a loaf of bread and two cans of soup can each be purchaced for $2. Then we can say, the value of 1 loaf of bread = 2 cans of soup.

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