ACCA Applied Knowledge · Business and Technology · Microeconomic factors
In a free market, what is the main role of the price mechanism?
The price mechanism allocates resources by signalling scarcity and surplus. Rising prices show demand exceeds supply and encourage more production and less consumption; falling prices show the opposite. It does not ensure affordability for all consumers or regulate the profit margins firms earn.
- ATo allocate resources by signalling scarcity and surplus to buyers and sellersCorrect
- BTo guarantee that every consumer can afford essential goods
- CTo fix the profit margin that firms may earn
Explanation
Prices rise when demand exceeds supply and fall when supply exceeds demand. These signals lead buyers and sellers to adjust their behaviour and so allocate scarce resources. The price mechanism does not guarantee affordability or set profit margins.
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