Define the term price mechanism and how it works.

The price mechanism and its working:

The above demonstrated diagram assumes the market is into equilibrium, whereby demand equivalents supply at point A (P₁ Q₁). The given would occur must there be a decrease or increase in demand or supply, ceteris paribus for example, all other things being equivalent.

An increase into demand by D₁ to D₃ along with supply unchanged at S₁would make a shortage into the market equivalent to Q₄ minus Q₁ or the dissimilarity between point A and G. Suppliers knowing regarding the shortage and driven through profit motive will raise prices, and buyers knowing that there is a shortage would be prepared to pay more for the good or service thus putting pressure onto prices to increase. The recent demand curve D₃ will contract and the existing supply curve S₁ will extend when prices rise, till a new equilibrium price and quantity is determined by the market at point C (P₃Q_s).

The same as a decrease in demand through D₁ to D₂ along with supply unchanged at S₁, a raise into supply from S₁ to S₃ along with demand unchanged at D₁ and a decrease into supply from S₁ to S₂ along with demand unchanged at D₁.