Can You Define Instability And Price Distortions?


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Muhammad Abdullah786 Profile
The market economy is decorated with the instability because of inefficient use of resources. The instability is associated with upward and downwards swings of economic activity. As a result of such business cycles, there is uncertainty in the field of investment. As in the phase of boom, there is a wide spread rise in prices, wages and profits etc.

while in depression, there is unemployment and unsold goods and services, thus bringing a lot of miseries for human being. Sometimes, there is shortage of goods, while on other occasions; there is the phenomenon of over production of goods and services. Thus, cyclical; instability causes inefficiency in respect of investment, capacity utilization, labor employment and need satisfaction. Whether all this will coincide with Pareto's of consumption and production?

Price distortions:
The market economy runs on the basis of signal of price whether it is price of a good or price of a factor. But in market economies, particularly in UDCs there are price distortions. As a result of price distortions the prices do not reflect the preferences of consumers: scare or real value of factors of production like capital and labor etc; real rate of return of producer's etc. thus we find that market mechanism fails to assess the real value of factors and goods.

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