Prices are also very important in maintaining productive efficiency. In the 5Es lecture on Productive efficiency we defined it as producing at a minimum cost. In order to minimize costs, producers must know the prices of the resources. If these resource prices are determined by demand and supply then they will reflect the relative scarcity of the resources and their relative importance (more scarce and important resources will have a higher price) and the economy can achieve productive efficiency. In a capitalist society prices are determined by the interaction of demand and supply. Since prices are so important, we need to better understand how they are determined. why is the price of gasoline $1.59 a gallon. Why does a candy bar cost $0.75? Why is the price of plywood normally $10 a sheet, but $30 a sheet after a hurricane?
For more explanation I will share a picture with you.
