Summary04 - CHAPTER 4 SUMMARY 1 What are the two main...

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CHAPTER 4 SUMMARY: 1. What are the two main functions that prices perform in market economies? How do they address the three main questions: what gets produced, how are they produced, and who gets the products? How do prices transmit information about changing consumer wants and resource availability? In market economies, prices answer the three main questions that any economic system must address. Prices do this by performing two main functions: rationing the goods and services that are produced and allocating the resources used to produce them. The question of who gets the goods and services that are produced is answered by the rationing function that prices perform. Products are rationed according to willingness and ability to pay the market prices for products. The questions of what gets produced and how they are produced are answered by the allocative function that prices perform. Prices transmit information between consumers and producers.
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