Price Mechanism Adam Smith spoke of the ‘invisible hand’ – through the pursuit of individual self-interest, resources are allocated in society’s best interests “The means by which the many millions of individual decisions each day by consumers & firms interact to determine the allocation of scarce resources.”

The Signalling Function Market prices adjust to ‘signal’ to producers where resources are needed more and less Eg. if consumers want more iPods and less portable CD players, prices for iPods will rise, signalling to producers to allocate resources to their production

Incentive Function Prices provide incentive for consumers & producers to use resources in the most efficient way Eg. high prices encourage efficiency; low prices encourage utilisation of less valued resources

Rationing Function Resources are scarce Prices allocate resources to those willing to pay Eg. the more scarce a resource, the higher its price will be and the less people will want / be able to have it