Explain the long-run effects of the guiding function of price

Economics Dec 14, 2020

Explain the long-run effects of the guiding function of price.

Expert Solution

In the long run, the higher price of products will signal more firms to enter the product market, as it will seem more profitable than some other markets. As firms enter, supply increases, causing the price to fall relative to the short-run price and quantity to increase further. The higher short-run price has guided more resources into the market.

The guiding function is the movement of resources into and out of markets in response to change in the equilibrium price of a good or bad service

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