The fact that prices
carry not only information but also incentives for
economic agents to act means that prices are important in
deciding what goods are produced, or, in the jargon of
economists, they help allocate resources. Consumer
preferences, the relative availability of resources, and
technology determine how much of each good and service will
be produced in a market system.
Economists sometimes make an analogy to politics to
explain how a price system decides what should be produced.
A political election offers citizens a variety of
candidates, each of whom tries to convince the citizens that
his policies are best. In the process of voting, the
electorate keeps some candidates and retires others to
private life. Because political leaders must keep coming
before the citizens for election, the actions they can take
are limited. The electorate has ultimate control over the
policies that a democracy adopts.
Citizens, as consumers, also vote in the marketplace. The
marketplace offers consumers a variety of products, and each
producer tries to convince consumers that his product is
best. Consumers vote for products by spending their dollars.
Products receiving a lot of dollar votes will be
profitable and will continue being produced. Products that
do not receive enough dollar votes will die. Dollar voting
provides feedback to producers. It tells them whether their
performance is acceptable or not. Dollar voting implies that
consumers, not producers, ultimately decide what will be
produced in a market economy. This power of consumers is
often called "consumer sovereignty."
People who like the market system tend to stress its
responsiveness to consumer desires. Compared to systems of
central planning, markets usually perform well on this
basis, though there are conditions under which markets
falter and consumer sovereignty is weakened. Also, there are
times in which a society may not want the consumer to be
sovereign. It may decide that there is some social goal more
important than individual goals. When nations are at war,
for example, they usually want to lessen consumer
sovereignty. As a result, most nations reduce the importance
of market decisions and increase the importance of
allocation by government direction and regulation in times
Next we see how the concept
of feedback helps one understand a market system.