The Price System Essay Sample

The price system is a system set in place to answer economic questions of what, how, and for whom to produce. The decision of what to produce is not determined by the individual consumers and firms but more through a medium of prices. Businesses exist together and therefore are all connected and intertwined, and therefore they all affect each other. Prices are determined by supply and demand, not the cost of production. How many people want a product and how much they can and are willing to pay for it defines and determines the price of the product.

A way to better understand the basic problem that businesses face is in the Robinson Crusoe example. This example shows an endless set of initial needs as such as shelter, hunger, thirst, security, etc. but there’s no way for him to satisfy each need at once and so he must decide which need is the most pressing. The constant problem he is facing is alternative applications of his time and labor, which is the problem of where else his time and labor could be spent. The Swiss family Robinson can meet their needs easier because while there are more mouths to be fed there are more hands to work to provide that food. Where there is a more diverse labor pool there are more opportunities for them to practice specialization of labor, which allows them to be more productive. 

The price system solves the problem of alternative applications of labor and capital. A higher demand for a product raises the price which will then raise production and attract more suppliers. An increase in supply will reduce the price of the product. This cycle will continue until the products supply and demand reaches equilibrium. 

Prices are determined through the supply and demand and because of that they also affect the supply and demand.