9. The Price System: Knowledge and Information
Daniel J. Smith is an assistant arofessor of aconomics at the Manuel H. Johnson Center for Political Economy at Troy University.
Why are prices important? Prof. Daniel J. Smith of Troy University describes the role prices play in generating, gathering, and transmitting information throughout the economy. Information about the supply and demand of different goods is dispersed among different buyers and sellers in an economy. Nobody has to know all of the dispersed information; individuals need to know only the relative prices. Based on the simple information contained in a price, people adjust their behavior to account for conditions in supply and demand even when they are unaware of that information.
- Information and Prices [Article]: Donald J. Boudreaux explains the complexity of economies and the vital role prices play in coordinating economic activities.
- The Use of Knowledge in Society [Article]: Friedrich A. Hayek explains how the market process collects widely dispersed knowledge, which generates prices to be used by both consumers and producers.
- The Pretense of Knowledge [Article]: Friedrich A. Hayek's Nobel Prize lecture emphasizes the importance of knowledge in economic analysis and offers a critical analysis of those who overlook the true nature of knowledge.
- Where Do Prices Come From? [Article]: Russell Roberts discusses the market forces that determine prices and the process by which prices adjust.
- I, Pencil [Article] by Leonard E. Read. A classic 1958 essay that illustrates the process of spontaneous order through the story of the creation of a simple pencil.
- I, Pencil [Video]: Milton Friedman demonstrates through the example of a pencil how market prices provide just enough information to encourage social cooperation and prosperity.
- How Markets Work [Article]: Eamonn Butler provides an excellent short article on the fundamentals of markets and the benefits associated with market transactions (found on pp. 17-25).
Use these questions to enhance your understanding of the topic. We recommend watching the featured video first; the suggested resources will also help.
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Comments
Price control = Shortage and misallocation.