Answer to Question #81654 in Microeconomics for John. L

Question

Provide a good explanation price mechanism and its role in market action by allocating scarce resources among competing needs in a free market and provide a real-world example.

Answer 1

The price mechanism describes the interaction between buyers and sellers how the forces of demand and supply in a free market determine the prices of commodities. The price mechanism also determines the allocation of scarce resources between competing uses. Resources are allocated to where there is a shortage while they are moved away from where they are least demanded. When the demand for potatoes exceeds the supply, there is a shortage and the price increases. Potatoes producers are encouraged to produce more to get more revenue.