The role of the price mechanism

Resource allocation

Price mechanism: moves market into equilibrium.

  • Scarce resources are allocated and reallocated in response to changes in price.
  • Price signals are given to producers what consumers wish to buy
  • Price changes as a result of change in equilibrium. 
  • A higher price would provide incentives to firms to produce more, since there is a larger profit. 

Opportunity cost: is the next best alternative forgone. When a choice is made, there is an opportunity cost.