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.
