Behaviour of Economic Participants

A fundamental conflict exists between consumers and producers. Consumers are motivated by satisfaction, known as utility in economics, and as such want low prices. Producers are motivated by profit and, therefore, want high prices. The price mechanism resolves this conflict, and in so doing, performs a rationing function.

The equilibrium price will attract a certain number of producers who are happy to make normal profit. These producers require resources to make the goods and services demanded by consumers. Producers who are willing to pay the market price for the resources will do so. This forces the producers to allocate the resources efficiently.

The market price also allocates the product in an efficient way. If there is a shortage, prices begin to rise, forcing some consumers to leave or reduce their consumption. The product will be distributed to the consumers who have the greatest need or desire for the product as shown by their willingness to pay the equilibrium price. As Adam Smith observed in 1776, when producers and consumers act in their own self-interest, the welfare of society in general is enhanced.