Question on: JAMB Economics - 2012

The price system plays a crucial role in allocating resources efficiently within an economy. It does this through the following:

• Signaling: Prices act as signals to both producers and consumers. High prices often indicate scarcity or high demand, prompting producers to increase production and consumers to conserve. Conversely, low prices suggest abundance or low demand.
• Incentives: The price system provides incentives. Producers are motivated to produce goods and services that fetch higher prices, reflecting consumer preferences and societal needs.
• Allocation: Resources are guided to their most productive uses, as producers are driven to allocate resources where they can generate the highest returns.