what is the role of price in price mechanism?

Answer 1

When economists use the phrase "the price mechanism," they are referring to the process by which changes in prices guide and shape changes in the value and types of the goods and services that are produced.

Suppose that consumers decide that they want to spend more on VCRs. More consumers show up at stores hoping to buy VCRs. The stores see the higher demand, raise their prices, and also order more VCRs from producers.

Higher profits from making VCRs induces firms to expand production. Higher prices for VCRs curbs demand. Thus the system returns to a stable point with more production and purchase of VCRs, and less production and purchase of other goods.

Thus prices act as a mechanism that guides the allocation of productive resources--machines and workers--to different sectors of the economy.

Answer 2

Pricing mechanism enables the economy to allocate resources to where they are most productively used in satisfying people's needs. Pricing serves as a guide rail to discourage producers from wasting resources making things that are unwanted, and instead to make things that ARE wanted.

No individual, or corporation, or government agency could possibly possess all the information needed to accurately assess the most efficient and productive way to use materials and labor -- there are too many variables, too many combinations and permutations, and there's no good means of even collecting most of the information that's needed. But a free pricing mechanism turns the economy into a supercomputer that works on this problem by constantly processing information as to what is needed, where, by whom, in what quantity, and who can make best use of scarce resources.