Describe how the price mechanism acts as a rationing in resource allocatoin?
describe how the price mechanism acts as a rationing in resource allocatoin;
in other words, how does it address the problem of what to produce, how it is produced, and who gets the goods produced.
Answer:
Housing is a good and relevant example. It seems that everyone wanted to buy a house or trade up their house in the past few years. Since the supply of houses is somewhat fixed in the short run -- it takes several months to build a house -- the price of houses skyrocketed as new buyers jumped into the housing market. Since there were more buyers than sellers, the price mechanism was key in distributing the available housing. Those most willing to pay were allocated the houses that were for sale.
The sharp rise in houses was also a signal to builders that houses were now in short supply. They responded by producing many, many houses. Perhaps too many, as many forecasters are predicting that house prices may actually fall in the next year.
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in other words, how does it address the problem of what to produce, how it is produced, and who gets the goods produced.
Answer:
Housing is a good and relevant example. It seems that everyone wanted to buy a house or trade up their house in the past few years. Since the supply of houses is somewhat fixed in the short run -- it takes several months to build a house -- the price of houses skyrocketed as new buyers jumped into the housing market. Since there were more buyers than sellers, the price mechanism was key in distributing the available housing. Those most willing to pay were allocated the houses that were for sale.
The sharp rise in houses was also a signal to builders that houses were now in short supply. They responded by producing many, many houses. Perhaps too many, as many forecasters are predicting that house prices may actually fall in the next year.
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