1. Prices as Signals and Incentives
Unit 6.2

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

3. 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.

4. 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.