What is the function of the price
The price takes on different functions in the free market economy. The following are the individual Price functionspresented:
Signal / information function
The price tells you the scarcity of a good - the price informs you. A price change in particular shows the shift in the scarcity ratio. But it doesn't always have to be a scarcity. The information function describes what a good is currently worth. This function plays an important role in the stock exchanges in particular. According to some theories, the price of a share represents a so-called fundamental value, i.e. the value that all market participants are willing to pay if they had all available information about the company and could analyze it correctly.
E.g. the price of a share in company X is 80 euros. Since, according to the latest sales figures, a new product does not sell as planned, the share price drops to a value of 75 euros. If you compare both values, the price informs you that it is probably not quite right in the company at the moment.
Steering / allocation function
Directing the factors of production for most profit. The higher the productivity (profitability), the higher the factor price. In plain language, this means that the price directs supply and thus the use of production factors on those markets where there is the greatest demand and consequently the highest price and thus the highest profit can be achieved.
Adjustment / plan reconciliation function
Balances supply and demand by aligning business and household plans.
The price explains and educates producers and consumers to use scarce goods sparingly. The more expensive a good is, the more carefully it is handled, since waste could mean great losses. By increasing the price, it can also be achieved that the goods concerned are replaced (substituted) by other goods.
According to Darwin: the weakest flies! In terms of the economy, this means that companies whose production costs are above the respective equilibrium prices (market prices) in the long term have to leave the market.
Allocation and distribution function
Prices determine the standard of living of individual economic agents, such as consumers and manufacturers.
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