How is the price mechanism defined in economics?

The price mechanism is defined as the interaction between buyers and sellers that determines price. This concept illustrates how supply and demand influence the prices of goods and services in a market economy. When buyers desire more of a product, demand increases, which can drive prices up. Conversely, if there is a surplus of a product and not enough demand, prices may fall. This interaction helps allocate resources efficiently as it reflects consumer preferences and producers’ willingness to supply.

The price mechanism is a key component of market economies as it helps facilitate exchange, coordinate economic activities, and signal the relative scarcity or abundance of products, allowing for effective resource distribution.