Prices as Signals and Incentives Unit 6.2

How the Price System Works Competitive Pricing Sellers will lower prices to attract customers Characteristics of a Price System It is Neutral Prices do not favor producers or sellers It is Market Driven Market forces, not central planning, determine prices It is Flexible When market conditions change, prices can change quickly It is Efficient Prices will adjust until the maximum number of goods and services are sold

Incentives Prices are one of the main considerations when making a purchase. When prices are lower than we expect, this encourages us to buy, but if prices are higher than we expect, we are discouraged from buying.

Prices and Competition Sellers are always looking for a edge on their competition. By lower prices, they can attract customers, but they lose profit per sale. This is why businesses are always looking to lower costs. The business with the lowest costs, can offer their product at the cheapest price, attracting consumers. Cutting costs can go too far though, and it is possible to end up sabotaging the business by using inferior raw materials, thus making the end product subject to failure, and thus a bad reputation.