Question

Discuss how the price mechanism allocates resources through consumer's choice

Answer 1

Price mechanism shows how changes in prices leads to changes in consumer demand and thus consumer behavior and hence resource allocation.

When prices are high, increase in prices leads to a fall in demand, thereby leading to a leftward shift in demand curve. This means at the current price only those who value the good too high will buy the good while others will postpone buying decisions and wait for price to fall.

This leads to effective allocation of resources as people will buy goods as per their valuations when prices change.