2.3.3—Price mechanism

The price mechanism uses price signals, incentives and rationing to coordinate scarce resources in markets.

Prices communicate relative scarcity, reward suppliers and ration demand, but may exclude people with low income or ignore external costs.

Trace how a change in demand or supply changes price and the resulting behaviour.

A shortage of rental homes raises rents, encouraging construction but making access harder for some households.

The price mechanism coordinates allocation, not necessarily fairness or social welfare.