How Market Use Knowledge
De-centralized VS Centralized Knowledge
What Rizzo is trying to say is that centralized knowledge is an impossible dream, but decentralized knowledge can, but not always, will work very well. Some types of knowledge are useful and others are not. The best systems are those that can gather and process decentralized knowledge; like democracy and well functioning markets are akin to giving people 'their own thermostat'.
Prices adjust to clear the market, if a price is "wrong" we'll see a price rise or fall so that the number of people who want the good becomes close to the number of people who receive the good. A price however seems to be more than that; stuff gets on the shelves even though so many parts of our demand are constantly changing. There is more to just simply shifting supply and demand curves.
When prices of a good change, various consumers will either purchase more, purchase less, or not change their behavior. What we're trying to get at is how much less or how much more; we're bringing in elasticity. SO... what we need to think about are how many substitutes are available to consumers. When we start looking at elasticity we need to think about the trade-offs suppliers make to supply their good.
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