A price mechanism is an economic tool that facilitates the determination of prices for goods and services through the interplay between supply and demand. It is the manner in which the profits of goods or services affect the supply and demand of goods and services, principally by the price elasticity of demand. The price mechanism is an economic model where price plays a key role in directing the activities of producers, consumers, and resource suppliers. It affects both buyers and sellers who negotiate prices. The price mechanism is part of a market system and comprises various ways to match up buyers and sellers.

The price mechanism is the means by which decisions of consumers and businesses interact to determine the allocation of resources. It performs a signaling function, where prices adjust to demonstrate where resources are required. Prices rise and fall to reflect scarcities and surpluses. If prices are rising because of high demand from consumers, this is a signal to suppliers to expand production to meet the demand. If prices are falling because of low demand, this is a signal to suppliers to reduce production.

In summary, the price mechanism is a system where the forces of demand and supply determine the prices of commodities and the changes therein. It is an economic tool that facilitates the determination of prices for goods and services through the interplay between supply and demand. The price mechanism affects both buyers and sellers who negotiate prices. It is part of a market system and comprises various ways to match up buyers and sellers. The price mechanism performs a signaling function, where prices adjust to demonstrate where resources are required.