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Allocation of resources

Concerns the mechanism of market forces which helps in the allocation of resources. As the price rises, more firms are encouraged into the marketplace with a view to earning some of the profits available in that particular market. This then forces the price down as the supply line moves to the right and therefore forces firms to be more competitive. Resources are then allocated to making the business more efficient or to encourage more customers to purchase. This happens until the point when a business cannot make enough of a return for its shareholders (ie either marketing becomes too expensive, or the price falls to a point where it is uneconomic to remain in the market). Hence the price mechanism (determined through supply and demand) helps firms to allocate their resources in the most profitable way.

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