The price mechanism describes the means by which millions of decisions taken by consumers and businesses interact to determine the allocation of scarce resources between competing uses
The price mechanism plays three important functions in a market:
1/ Signalling function
2/ Transmission of preferences
One of the features of a market economy system is that decision-making is decentralised i.e. there is no single body responsible for deciding what is to be produced and in what quantities. This is a remarkable feature of an organic market system.
3/ Rationing function
Mixed and Command Economies and Prices
Prices and incentives
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