Answer to Question #82406 in Microeconomics for priscilla

Question

price mechanism role in market action by allocating scarce resources among competing needs in free market and provide a real world example

Answer 1

Price mechanism describes the interaction between buyers and sellers and 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 needs. Resources are allocated to where there is a shortage while they are moved away from where they are least demanded. When the demand for milk exceeds the supply, there is a shortage and hence the price increases. This encourages milk farmers to produce more milk for enhanced revenue.