Market clearing prices in a market system act as
A) a signaling device.
B) a direct measure of resource costs.
C) a way for producers to advertise.
D) a legally determined rationing device.

Question

Quizplus · Accepted Answer

Market clearing prices act as a signaling device to both consumers and producers to allocate resources efficiently. This is because the price of a product or service reflects the supply and demand within the market. When supply increases, prices tend to fall signaling to consumers to purchase more and signaling to producers to decrease supply. Conversely, when demand increases, prices tend to rise, signaling to producers to increase supply and signaling to consumers to purchase less. This mechanism helps to allocate resources efficiently by matching production with consumer demand.

Market Clearing Prices in a Market System Act as