ECO- The role of markets in allocating resources, page no 42

What is price mechanism:

The price mechanism is the process through which the forces of supply and demand interact to determine the prices of goods and services in a market economy. It plays a key role in allocating resources efficiently by signaling producers and consumers about the relative scarcity or abundance of products. When demand for a product increases, prices tend to rise, encouraging producers to supply more, while consumers may buy less. Conversely, if demand decreases, prices fall, leading producers to cut back on supply and potentially encouraging more consumption. This dynamic helps balance markets and adjust for shifts in production and consumption preferences. For example, wage rates are determined by the forces of demand for labour{By private sector firms} and supply of labour{By workers who offer their labour services}.

Features of price mechanism include the following:

• There is no government interference in economic activities. Resources are owned by private economic agents who have the economic freedom to allocate scarce resources without interference from the governments.

• Goods and services are allocated on the basis of price --- a high price encourages more supply whereas a low price encourages consumer spending. Goods and services are sold to those who have the willingness and ability to pay.

• The allocation of factors resources is based o financial incentives --- for example, agriculture land is used for harvesting crops with the greatest financial return, while unprofitable products are no longer produced.

• Competition creates choices and opportunities for firms and private individuals. Consumers can thus benefit from a variety of innovation products, at competitive prices and of high quality.

THE END