Answer:
The market price of a good equates the total cost of production and the marginal value that consumers attach to a unit of the good. Because the price also reflects the opportunity cost of the resources employed to produce the last unit, consumers will value the last unit until they purchase at least as much as they would value any other good that those resources could have produced. These characteristics of perfectly competitive markets guarantee productive efficiency.
Explanation:
Prices in the market are determined by supply and demand. If demand exceeds supply, that is, there is excess demand, the price will rise. If the supply exceeds the demand, that is, there is an oversupply, the price will fall. When demand and supply are equal, the price of a commodity theoretically corresponds to its cost of production. If the market refuses to pay a price equal to the cost of production, the cost of production will exceed revenue and therefore the cost of production must be adjusted to the market price in order to avoid losses. If the commodity has already been produced, one has to settle for the loss-making price it obtains on the market. Prices are distorted, for example, by raising taxes (such as VAT) and subsidies by lowering prices. In addition, prices are distorted by imperfect competition.
