What is the role/importance/uses of price in a free market?

Answer

Price is the amount of money that has to be paid to acquire a given product:

• Price acts as a signal for shortages and surpluses which help firms to determines what to produce and how to produce it
• Determines the value of goods and services.
• High prices act as incentives to increased supply of goods and services and economic growth
• Guides producers on what techniques to use i.e. technology to use
• Helps consumer in making consumption plan
• Determines peoples income distribution, the price mechanism is a system of real flows from producers to consumers and from consumers to producers
• Ensures efficient utilization of resources; the factors of production (land, labour, capital) will be used for their most valuable purposes.
• High prices is an incentive for improvement on quality of the product
• Prices help to redistribute resources from goods with little demand to goods and services which people value more.
• Income distribution in the economy is determined by price mechanism. High incomes or revenues go to those expensive goods.
• Distribution of goods and services; the price mechanism determines the products are for. Goods and services are normally produced for those to can pay high prices
• Where to produce commodities from is determined by price mechanism. Production units tend to be located in places where there is demand for the products
• Price mechanisms determines when to produce; goods are produced when their demand is higher to ensure profit maximization
• They help in the automatic adjustment of demand and supply for example when prices increase, quantity demanded reduces and supply increases.