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Good economics is common sense and the role of prices is just your reaction to offers of trade.  First, your money represents work that you do to earn that money.  When you buy something, you instinctively know you are trading a certain amount of your time at your work for the goods or services you are buying.  The more work you have to do to buy an item, the less willing you are to make that purchase, or the greater the price, the less attractive the trade.  

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On the consumer side, everyone is different and effected by different circumstances, therefore all people value an item to purchase differently.  To some an item is not desired at all and they buy it at $0.  Others could value it just a little and so on, all way to a few people who will to pay great amounts to buy that item.  Therefore, a low price will attract many buyers and the higher the price becomes, the less people are willing to buy.  This is just common sense, the lower the cost the more people buy.  Stores know this very well and is proven every time a ‘sale’ moves more product.  
When prices markedly rise for a business on a certain expense, the business quickly seeks out new suppliers.  The higher price sends a signal that more supply is needed to bring the price back down.  A business can bring that service ‘in house’ or encourage people with that expertise to start suppling that service again.  These higher prices also cause greater interest in innovation and capital.  Often that expense can be substituted for a different but acceptable alternative which leaves less demand on the original product so the price can drop.  Free enterprise is very dynamic leading to many responses to changing prices.
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Let says there are 1,000 identical widgets produced every day by ten producers at 100 widgets each. At $x price, only 900 are sold a day.  No producer wants to be the one not to sell their product so the producer with left over product will lower their price have sell out.  All the producer will eventually drop their price so THEY sell all their product.  As the price decreases, more people decide to buy, thus bring demand up to 1,000 widgets a day.  Let’s say that the price settles at $.90x to achieve the demand of 1,000 widgets.  
All the producers will determine for themselves if that price is profitable enough for their employees and themselves, the employers.  If one producer closes down, the supply is at 900.  If the demand is 1,000 widgets, customers will be deprived of 100 widgets.  Many customers will bid the price back up to $x so that they are not the deprived of their desired widget.  The factors and scenarios are so numerous that no article can address them all but the principal on the production side is that if prices are high, more producers looking for that high profit will produce more product.  The opposite is true; producers that value their labor and time more than the going price will allow them to earn will seek different more profitable products to make.       
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If a business is selling $x and their expenses are $1.1x then they are losing $0.01x.  The business owner might be the one making the final call to lay everyone off, but in reality, the customers of that business did not value their product or service enough to pay the needed expenses.   In the end, a business owner cannot just choose to pay out more then what is coming in just to be nice.  The customers are the final deciders of whether a business fails or succeeds.  Thousands of factors go into decisions surrounding attempts to save a failing business that are too numerous for this article.    
On the production side, the businessman looks at the going price and tries to determine their cost per product.  The businessman decides whether the profit achievable at the ‘going price’ is worth his labor of starting that business.  That businessman will often evaluate many products in search for the most profitable enterprise to start.  That search and evaluation is a key component ensuring the ‘correct’ amount of product is produced.  
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If a certain sector of the economy, even a very small subsection is requiring x% of the overall labor to fulfill the demand, there are several key lessons surrounding significant changes in that sector.  If new capital meets with ingenious ideas that lead to substantial productivity gains, less labor is needed to achieve the same output.  This leads to two great things happening, the price drops making that item available to a larger group of consumers and labor is freed up to serve people in new ways.  The left, just looks at the lost jobs and those that understand economics look at increased living standards for everyone.     
 The proper price cannot be imposed by government officials, in fact, when they try, things go badly.  If the government prices an item to high, supply would increase and the demand decrease, leaving excess product.  If the government price an item to low, quantity and quality are decreased and demand increases.  Shortages will occur and government would step in and determine rationing.   Government has a long history of distorting the price and then trying to regulate more to ‘fix’ the problem they created, often making the problems worse.  The price mechanism solves problems if government gets out of the way.    
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In the banking sector, the price of people borrowing capital for a certain amount of time is called the interest rate.  In the free enterprise system, the higher the price (rate), the less people are willing to buy (take a loan) and alternatively, the lower the price, the greater amount people will be willing to borrow.  Ten percent interest is likely to be paid to keep a business open, however is likely not going to attract many home buyers.  On the supply side, the more a bank is willing to offer to pay someone to deposit their money, the more money (capital) will be saved, thus more will be available to be lent out.  Government through the Federal Reserve highly distorts this market wreaking havoc with the economy.
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Comments

05/12/2016 2:06am

Price level of the goods and services are the best manner and method to distribute and spread the goods. It is the decisive and instrumental means of the goods and their enhanced production.

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    Bill Haley

      Bill Haley started Haley2024 in the spring of 2013 in an effort to his part in restoring freedom to America.

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