How do prices direct economic activity in a market economy?

Question

Quizplus · Accepted Answer

Prices in a market economy serve as a signal to both buyers and sellers about where resources are in demand and where they are not. High prices indicate a shortage of a good or service, prompting suppliers to increase production, while low prices suggest a surplus, prompting suppliers to reduce production. On the demand side, high prices encourage consumers to reduce consumption, while low prices encourage them to increase it. As a result, the price system helps to allocate resources efficiently in the economy, without the need for central planning or government intervention.

How Do Prices Direct Economic Activity in a Market Economy