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Economics

What are the uses and advantages of price mechanism?

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Wiki User
06/13/2010

Basically the price mechanism acts as "an invisible hand" or signaling mechanism. They play a key role in allocating resources and the distribution of the national product.

Consumers react to prices with higher or lower demand and producers act accordingly. In other words prices help producers determine the quantity supplied. If consumers demand is high at a certain price, then producers know that they ought to increase supply. If demand is low then they ought to reduce supply. ..that's the basic concept. For more I'd suggest reading some books on micro economics or stuff like Lipsey and Crystal.

1. IT ALLOCATES RESOURCES EFFICIENTLY.( DEMANDERS GET THE MOST FOR THEIR MONEY AND SUPPLIERS GET A GOOD PRICE FOR THEIR PRODUCT)

2.DEMAND AND SUPPLY ARE ABLE TO ACT NATURALLY. ECONOMIC EFFICIENCY.( THE ALTERNATIVE IS A CENTRALIZED SYSTEM WITH THE GOVERNMENT ALLOCATION RESOURCES. THIS RAISES THE QUESTION," DOES THE GOVERNMENT KNOW WHAT IS BEST FOR THE PEOPLE?")

these are quotes from my economics book.