b

Firstly, prices perform a signalling function. This means that market prices will adjust to demonstrate where resources are required, and where they are not.

Prices rise and fall to reflect scarcities and surpluses. So, for example, if market prices are rising because of high and rising demand from consumers, this is a signal to suppliers to expand their production to meet the higher demand.

Consider the left hand diagram on the next page. The demand for computer games increases and as a result, producers stand to earn higher revenues and profits from selling more games at a higher price per unit. So an outward shift of demand ought to lead to an expansion along the market supply curve.