Answer to Question #24835 in Microeconomics for kaustav

Question

why is price mechanism said to be an institution of exchange?

Answer 1

Price Mechanism causes many changes in the economic environment. If there is an increase in demand, then prices will go higher causing a movement along the supply curve. An example of price mechanism in the long term is the oil crisis during the 1970s.
The crisis caused more nations to start producing its own oil due to dramatic price increases of oil. Since more nations started to produce oil, the supply curve shifted more to the right meaning there was more supply of oil.
Price Mechanism affects every economic situation in the long term. Another good example of price mechanism in the long run is fuel for cars. If fuel becomes more expensive, then the demand of fuel would not decrease fast but eventually companies will start to produce alternatives such as biodiesel fuel and electrical cars. Price mechanism is a system by which the allocation of resource and distribution of goods and services are made on the basis of relative market price