Markets decide what gets made without anyone planning

1. No official decides how many loaves the UK bakes, yet the shelves are stocked, because the price does the deciding.
2. Buyers reveal what they want by paying for it, and producers follow the prices that cover their costs, as set out in 2.4.1.
3. The question of how resources should be allocated is posed in 1.2.2, and the price mechanism is the market economy's answer.

Prices signal, ration and give incentives

1. Signalling: a price tells producers what buyers want more of and what they want less of, without any survey being taken.
2. Incentive: a higher price raises the profit on offer, which gives producers a reason to move resources into that market.
3. Rationing: when a good is scarce the price rises until only those willing to pay the most still buy, which decides who gets it.
4. The three work together, so the same price rise that signals scarcity also rewards extra production and limits who consumes.

Markets connect so a change spreads outwards

1. Because resources can move between uses, a change in one market alters what is available to every market that competes for the same resources.
2. Goods are linked on the demand side too, so a price change reaches the markets for substitutes and complements, as analysed in 2.4.4.
3. Factor markets and product markets are linked in the same way, which is the interdependence set out in 2.1.3.

Markets allocate well but not perfectly

1. The strength of the mechanism is speed and information, because prices adjust continuously and use knowledge no planner could gather.
2. It also has no administrative cost, since nobody has to be paid to work out what should be produced.
3. The weakness is that a price counts only what buyers and sellers pay each other, so effects on anyone else are left out, as covered in 3.8.1.
4. Rationing by price also means the outcome depends on who has the money, so a market answers what people can pay for rather than what they need.