Price and resource allocation

Mixed economies

• mix of private and state ownership of the means of production (capital) 
• mix of market and non-market provision of goods and services - have a market and non-market sector 

Planned economies (command economies) - the planning mechanism allocates scarce resources among competing uses,  to provide goods and services such as police, roads and health care

Market economies - The price mechanism allocates scarce resources among competing uses in the markets that make up the economy  

The price mechanism operates within mixed and market economies, but only to a limited extent - e.g. the black market - in a planned economy 

• The individual buyers and sellers decide what, how much, where and when to trade or exchange
• They do so with reference to their self-interest and to the alternatives or opportunities open to them; the exchange must be voluntary; if one party forces a transaction upton the other, it is not a market transaction 
• Prices convey information to buyers and sellers about self-interest and opportunities; for a market to allocate resources among different types of activity and to the coordinate economic activity throughout the economy, prices must repsond to the forces of supply and demand 

The signalling function 

• Prices signal what is available, convey the information that allows the traders in the market to plan and coordinate their economic activities
• Markets will function inefficiently, sometimes breaking down completely - leading to market failure, if prices signal wrong or misleading information 

The incentive function 

• Prices create incentives for economic agents (households and firms)
• To behave and make decisions in ways consistent with purchasing and achieving the fulfilment of their self-interest

The allocative function or rationing function 

• For markets to operate in an orderly and efficient manner, the buyers and sellers in the market must respond to the incentives provided by the price mechanism