Price mechanism

• Incentives- for competitive markets to work efficiently economic agents must respond to Price signals in the market
• Price mechanism are decisions of consumers and businesses interact to determine the allocation of resources. the free market price mechanism clearly does not ensure an equitable distribution of resources
• Price signals are changes in price which act as a signal about how resources should be allocated. a rise in price encourages producers to switch into making that good but encourages consumers to use an alternative substitute product
• Rationing is a rising price which can reduce the quantity demanded of a good or service
• prices have a signalling function because the price in a market sends important information to producers and consumers