Question

Describe how a dramatic price change in an industry works to inform and adjust the behavior of two groups: Buyers and Sellers. Contrast this with what would happen if there was no price-change signal (i.e. the price remains unchanged). You may use a real or imagined example.

Answer 1

In any free competitive market price acts like a signal . A dramatic change in price will cause firstly demand to fall . Quantity demanded falls as buyers are not able to afford such high price . This causes piling up of inventories because all that is produced is not sold in the market . So suppliers or sellers are ultimately bound to reduce production of supply curve shifts left .

If there was no price change signal then market mechanism does not work . A change in any other factor like say consumer income also changes demand which in turn signals producers or sellers as how much to produce & sell .