Price Mechanism

1
Price Mechanism

• Adam Smith spoke of the invisible hand
  through the pursuit of individual self-interest,
  resources are allocated in societys best
  interests
• The means by which the many millions of
  individual decisions each day by consumers
  firms interact to determine the allocation of
  scarce resources.

2
The Signalling Function

• Market prices adjust to signal to producers
  where resources are needed more and less
• Eg. if consumers want more iPods and less
  portable CD players, prices for iPods will rise,
  signalling to producers to allocate resources to
  their production

3
Incentive Function

• Prices provide incentive for consumers
  producers to use resources in the most efficient
  way
• Eg. high prices encourage efficiency low prices
  encourage utilisation of less valued resources

4
Rationing Function

• Resources are scarce
• Prices allocate resources to those willing to pay
• Eg. the more scarce a resource, the higher its
  price will be and the less people will want / be
  able to have it