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Using demand and supply analysis, explain how resources are allocated through changes in price in ..

Using demand and supply analysis, explain how resources are allocated through changes in price in ...a market economy. Help!

Resources will be allocated to those who offer the highest price for the resource.


Source: Here is the answer Zayn: Those goods which command the highest prices (when summed among all
individuals) provide an incentive for businesses to provide these goods
in a corresponding descending hierarchy of priority. However, the
ordering of this hierarchy of wants is not constant. Consumer
preferences change. When consumer preferences for a good change, then
bidding pressure raises the price for a particular good as it that
moves to a higher position in the hierarchy. As a result of higher
prices for this good, more productive forces are applied to satisfying
the demand driven by the opportunity for higher profits in satisfying
this new consumer preference. In other words, the high price sends a price signal
to producers. This causes producers to increase supply, either by the
same firms increasing production or new businesses coming in to the
market, which eventually lowers the price and the profit incentive to
increase supplies. Hence, the now lower price provides a price signal
to producers to decrease production and, as a result, a surplus is
prevented. Since resources are scarce (including labor and capital),
supplies of other goods will be diminished as the productive resources
are taken from other areas of production to be applied toward
increasing output of the good who has risen in the hierarchy of
consumer preferences. Also, as resources become more scarce the price
increases, which signals to consumers to reduce consumption thereby
ensuring that the quantity demanded does not exceed the quality
supplied. It is in this way that the free price system persuades
consumers to ration dwindling resources. Hence, supply and demand
affects price while at the same time, price a

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