Why Price Matter
Prices act as a rationing mechanism. The state of mankind is one of the infinite wants coupled with finite resources. The task of economics, then, is to figure out what is to be produced with our scarce resources. It is through prices that the resources we have get put to their highest-valued use in the economy. In order for this allocation to work, however, prices must be allowed to fluctuate freely. Let us look at an example. Let’s imagine that there is a large forest fire, wiping out a large portion of the supply of wood. As a result, the supply of wood has drastically decreased. This decrease in supply would raise woods price, causing a reallocation of wood throughout the economy. Since it would now cost more to use wood for production, only those uses where the producers viewed the raised price as still worth it would continue to use it. Those who decided that using wood was no longer viable would simply alter their business model. Wood would still continue to be used in, say