What Do Markets Do?

Markets ration scarce goods and services to the highest bidder.

This bidding process by consumers for final goods and services conveys information to suppliers as to where resources should be utilized.

Prices and profits are the signals which suppliers use in order to decide where resources should be utilized. In other words, monetary prices and profits provide the means for economic calculation: the ability to "calculate" profits (and losses) tells suppliers if they are using resources where consumers want them or if suppliers are making mistakes. Consumers are able to convey their tastes and preferences for one good over another simply by buying or not buying a good at a specific price (i.e., their actions reveal their preferences and then prices and profits reflect those preferences).

This economic calculation is the fundamental beauty (and efficiency) of markets, and is responsible for the allocation of scarce resources to the end of making consumers’ living standards much higher than otherwise.

Economic planners (those who try to allocate resources without the aid of market prices and profits) have failed time and time again. Hence, we see long lines, massive shortages and surpluses, and even total collapse of those economies that do not rely on markets to allocate scarce resources.

The bottom line is that the choice must be made as to how a scarce resource, say a parcel of land, should be used. When private property rights in the means of production (yes, the rules of the game are important here) are upheld, then that parcel of land will go to the highest bidder. And the highest bidder is willing and able to pay the highest price because the final consumer is willing and able to pay him/her a price for the output of that land which will enable that bidder to make a high return on his/her investment in the land. If consumers want more fast food restaurants, then that is what that land will be used for.