Dec
22
2012

Essay: Prices Help in the Allocation of Resources

Particularly, prices help in the allocation of scarce resources given a situation where there is the demand for production of two or more products. For instance, if an economy, driven by the demand of goods by consumers want to produce product X and Y, prices are solely responsible in the allocation of resources that produces either of the two products. Sowell illustrate a case where there is the need to produce milk products.

When the demand for yoghurt is on the rise, the producers would ultimately require more milk to address the demand. Nevertheless, the production of more milk would also entail buying and rearing more cows leading to a surge in the prices of meat as more cows would reach maturity rather than get slaughtered for meat. As such, changes in the prices and demand for specific good lead to a ripple effect in the entire economy.

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