Explain how the price mechanism works in condition of perfect market
In a perfect market, the price mechanism works based on the forces of supply and demand. When the market is in equilibrium, the price is determined where the quantity supplied equals the quantity demanded.
If the price is too high, producers will supply more goods and there will be excess supply, causing prices to fall. On the other hand, if the price is too low, consumers will demand more goods and there will be excess demand, causing prices to rise.
These adjustments in prices serve to bring the market back to equilibrium, where supply and demand are balanced. This process of price adjustments based on the forces of supply and demand is what is known as the price mechanism in a perfect market.
In a perfect market, there are several key assumptions that need to hold true for the price mechanism to work effectively, such as perfect information, no barriers to entry or exit, and homogeneous products. When these assumptions are met, the price mechanism can efficiently allocate resources and ensure that goods and services are produced and consumed at the right levels.