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Markets and the Problem of Scarcity, How and Why Market Prices Change

competitive market system, advance warning, market economies, market system, market economy

Another advantage of any competitive market system is a high level of flexibility and speed in responding to changing economic conditions. In economies where government agencies and central planners set prices, it often takes much longer to adjust prices to new conditions. In the last decades of the 20th century, the U.S. market economy has made these adjustments very quickly, even compared with other market economies in Western Europe, Canada, and Japan.

Market prices change whenever something causes a change in demand (the amount people are willing to buy at different prices) or a change in supply (the amount producers are willing and able to make and sell at different prices).. Because these changes can occur rapidly, with little or no advance warning, it is important for both consumers and producers to understand what can cause prices to rise and fall. Those who anticipate price changes correctly can often gain financially from their foresight. Those who do not understand why prices have changed are likely to feel bewildered and frustrated, and find it more difficult to know how to respond to changing prices. Market economies are, in fact, sometimes called price systems. It is important to understand why prices rise and fall to understand how a market system works.

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