Question

Does the normal reaction of the price system to a resource shortage provide an example of a positive or a negative feedback loop? Why?

Short answer

Answer: The price system exhibits a negative feedback loop in response to a resource shortage. The reason behind this is that the increase in price encourages more production and new suppliers entering the market, which in turn helps to stabilize the price and counteract the resource shortage.

Step-by-step solution

Defining the concepts

A resource shortage occurs when the supply of a particular resource is not sufficient to meet the demand. The price system is a mechanism in which prices of goods and services are determined by the interaction of supply and demand in the market. Positive feedback loops amplify changes, while negative feedback loops counteract and stabilize changes.

The price system's reaction to resource shortage

When there is a resource shortage, the demand for that resource exceeds the supply. This situation leads to an increase in the price for that resource, as suppliers try to profit from the scarcity and consumers are willing to pay more to obtain the scarce resource.

Identifying the feedback loop

In this case, the higher price induced by the resource shortage serves as a signal for suppliers to increase production (if possible) and for new suppliers to enter the market. This increase in supply helps moderate the price and eventually bring it back to the equilibrium level. This stabilizing effect represents a negative feedback loop.

Conclusion

The normal reaction of the price system to a resource shortage provides an example of a negative feedback loop. The reason behind this is that the increase in price encourages more production and new suppliers entering the market, which in turn helps to stabilize the price and counteract the resource shortage.