Economic profits and losses are true market signals because they

Question

Quizplus · Accepted Answer

Economic profits and losses signal to entrepreneurs and investors where they should allocate their resources to make the most money. They reflect the relative scarcity of resources and the demand for different goods and services. When entrepreneurs can earn high profits in a certain industry, it signals to others that there is a demand for that industry and others should shift their resources to that area. Likewise, when entrepreneurs incur losses in a certain industry, it signals to others that there is a lack of demand for that industry and resources should be shifted elsewhere. This system of profit and loss signals helps allocate resources efficiently in a market economy.

Economic Profits and Losses Are True Market Signals Because They