Why is the price system considered an efficient way to allocate resources in competitive markets?

• A. It ensures that all goods are distributed equally among all members of society.
• B. It eliminates the need for any government intervention in the economy.
• C. It allows resources to be allocated based on consumer preferences and producer costs, leading to equilibrium where supply equals demand.
• D. It guarantees that producers always make a profit regardless of market conditions.

Answer: (C)

Verified step by step guidance

1. Understand that the price system in competitive markets functions as a signaling mechanism, where prices convey information about the relative scarcity and value of goods and services.
2. Recognize that consumers express their preferences through their willingness to pay, while producers reveal their costs through the prices at which they are willing to supply goods.
3. Analyze how the interaction of supply and demand curves determines the market equilibrium price, where the quantity demanded equals the quantity supplied.
4. Note that at this equilibrium price, resources are allocated efficiently because goods go to those who value them most (consumers willing to pay) and are produced by those who can do so at the lowest cost.
5. Conclude that this decentralized decision-making process leads to an efficient allocation of resources without the need for central planning, but it does not necessarily ensure equal distribution or guaranteed profits for producers.