How Does the Price Mechanism Serve to Allocate Resources Efficiently?

price-mechanism-serve-allocate-resources-efficiently Credit: Peter Starman/Photographer's Choice RF/Getty Images

The price mechanism describes conditions which affect consumers' buying and selling decisions, and can be manipulated to influence economic situations around the globe in the long term. This manipulation is accomplished through a predictable swing in supply and demand.

This interdependent system of supply and price generally sees an increase in the price of a product or service when supply falls below demand, and a price reduction when a surplus exists. Manipulating the availability of resources, or providing alternative resources, can have an overall effect on prices. For example, as gasoline prices skyrocket, Americans' demand fuel does not decrease, but an inevitable decrease in spending in other areas prompts the production of alternative fuels, creating jobs. Governments are known to manipulate the price mechanism in order to affect changes in the economy.