Takeaway

No market is an island. Markets are linked geographically, through time and across different goods. The price of gasoline at your local gasoline station is linked to the market for oil in China. The price of oil today is linked to the expectations about the market for oil in the future and, through investment, to the market for oil in the past. Markets in one good are linked to markets in other goods. The supply and demand of flowers, asphalt, and candy bars are all linked through the worldwide market.

The worldwide market is neither designed nor, because it is so complex, is it ever completely understood. The market acts like a giant computer to arrange our limited resources to satisfy as many of our wants as possible. Prices are the heart of the market process. A price is a signal wrapped up in an incentive because prices signal the value of resources to consumers, suppliers, and entrepreneurs, and they incentivize everyone to take appropriate actions to respond to scarcity and changing circumstances.

Free market prices work as signals because through buying and selling, prices come to reflect important pieces of information. The futures price of oil, for example, can signal war in the Middle East and the futures price of orange juice can tell us about the weather in Florida. Market prices can be so informative that new markets (prediction markets) are being created to help businesses, governments, and scientists predict future events.