Price mechanism
Definition. The price mechanism is the system by which the forces of demand and supply interact in a free market to determine prices, which in turn allocate scarce resources without central direction. Prices act as signals and incentives that coordinate the decisions of consumers and producers.
The price mechanism performs three functions, signalling where resources are wanted, rationing scarce goods to those willing to pay, and providing incentives for producers to reallocate resources towards more profitable uses.
This term belongs to The Price Mechanism and Its Functions in A Level Economics. Read the full chapter for the diagrams, worked examples and exam technique.
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