How the interaction between consumers and producers enables optimal allocation of resources.
A producer is a person who creates an economic value through the production of goods and services needed while consumers are buyers of the produced goods and services. In that sense, these two parties are connected by trade and prices as well as other factors like supply and demand. Prices play the role of information transmission to different agents in the market. The presence of supply and demand plays a role in determining the degree and magnitude of the relationship between producers and consumers. Demand is the need for a product while supply is making the product available (Peteraf 311). Thus, an increase in the demand from consumers prompts producers to increase production, hence a higher supply for the product. Consequently, a decrease in the amount of quality demanded leads to a decrease in production.
Information on the demand and supply of a product in the market leads to a mutually beneficial relationship between the two parties, a reason why they need to be in constant interaction. Thus, a shift in the price is as a result of changes in supply and demand conditions hence transmitting information to the related parties about the state of the market (Buyya 1). For the consumers, it acts as a rationing function on whether they will be able to afford the item and the price they are willing to offer to purchase the item in order to gain profit. An increase in the price of a…
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