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Explain how, in a market economy, the price mechanism assists in the…

- - - - When
      - When price increases
        
        Customers automatically reduce demand
        
        "Invisible hand"
        
        Producers automatically increase supply
        
        more profit to be made
      - Creates new market equilibrium
        
        removes excess demand
    - - When demand is greater than supply
        
        prices automatically go up
        
        no longer a shortage as only people willing to pay the higher price are left in the market
- - - - Therefore the demand decreases until it creates an equilibrium with the supply curve
- - - - For example, food in a time of famine
    - - With these once you go past a certain point, an increase in price leads to an increase in demand
  - - - High price as possible with greatest demand
    - - Low cost as possible, as many other people demanding it as possible (for luxury goods)
  - - - Not often accurate representation of reality
        
        Only a model
      - Doesn't take into account other factors
      - Simple way of illustrating how resources are allocated in a market economy
  - - - Price mechanism may not move quickly enough if the good is inelastic
    - - Price mechanism will always affect the demand in a market economy
  - - - However, in the real world there is some degree of market control by the gvmt (e.g. price ceilings, price floors) so it doesn't always act so efficiently