Wednesday, April 21, 2010

Prices as Signals to Suppliers

We often tell our students that prices are important because they send messages. They don’t just send messages to consumers about what to buy and how to prioritize their wants. They also send messages to producers. They provide answers for the basic economic questions "What to produce?", "How to produce?", and "For whom to produce?"

The message can become clearer in articles like this one from The Houston Chronicle (HT to Izzit - you can find a lesson plan to accompany the article at the site under April 21, 2010).

The article talks about high technology designed to find deep oil. The cost of this technology and the recovery of the oil are only economically feasible because of higher prices. And the prices are a product, not only of the higher costs of recovery, but of the increasing demand. (Remember price is a scissors.)

Take a look at the article. I'd be interested in your thoughts.


Megan M. Orama said...

I do believe that oil is a resource that is limited. You can keep digging all you want, but that is only going to cost more money, and for what? Since technology is improving so much as they say, why don’t people start finding an alternative for oil?

Tim Schilling said...

Megan, I believe there is much more oil to be found, but I also believe it is going to be increasingly difficult and expensive to find. That brings us to another aspect of the price mechanism. It can tell us when it is profitable to look for substitutes. There are likely a number of things that could provide much of our energy, they are just too expensive to use. Rising prices will make them viable economic alternatives.