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

Explain your answer. Answer: The normal reaction of the price system to a resource shortage is an example of a negative feedback loop. This is because the increased price of the resource due to the shortage triggers a response that counteracts or stabilizes the initial shortage, eventually reducing its severity. The response includes producers increasing production and consumers decreasing consumption or finding alternatives, helping to alleviate the resource shortage.

Step-by-step solution

Define positive and negative feedback loops

In economics, feedback loops are used to describe the self-regulating nature of a system. A positive feedback loop is when an initial effect in a system triggers a response that amplifies the effect, causing it to grow larger or more severe. In contrast, a negative feedback loop occurs when an initial effect in the system triggers a response that counteracts or stabilizes the initial effect.

Explain the normal reaction of the price system to a resource shortage

The price system is the mechanism through which prices of goods and services are determined in a market economy. When a resource shortage occurs, the demand for that resource typically increases while the supply decreases. As a result, the price of the resource rises, which serves as an incentive for producers to increase production and for consumers to decrease consumption or find alternative solutions.

Determine if the normal reaction is a positive or negative feedback loop

The normal reaction of the price system to a resource shortage results in an increased price, prompting producers to increase production and consumers to decrease consumption or find alternatives. This response helps to alleviate the resource shortage, eventually leading to a stabilization of the system. Based on this analysis, it can be concluded that the normal reaction of the price system to a resource shortage is an example of a negative feedback loop. This is because the increased price triggers a response that counteracts or stabilizes the initial shortage, reducing its severity.