Prices are signals in the market. They tell producers how much to produce and help determine the amount consumers are willing and able to purchase.

Cost in input used for production will affect supply. Rise and fall in the cost of input will cause either a fall in supply or an increase in supply. If costs of inputs increase enough marginal cost could become higher than the price. Therefore, the firm may not be as profitable. If this is the case, production must be cut until marginal cost equals the lower price. If supply falls, the supply curve shifts left. If the supply rises, the supply curve will shift right. Another way to lower production costs is by advances in technology.

The role of prices

This section is on comparing prices of goods and choosing the cheapest possibility. In a free market, price system is flexible and there is a wide variety of goods and services. An advantage to the price system is that it is a universal language.