• The price mechanism plays a crucial role in allocating resources in a market economy.
• It fulfills three main functions: rationing, incentive, and signaling.
• The rationing function ensures that only consumers willing to pay the market price can purchase a product.
• The incentive function encourages consumers to increase their quantity demanded at lower prices and suppliers to maximize profits at higher prices.
• The signaling function helps buyers and sellers make decisions about buying or selling a product.
• Although the price mechanism has disadvantages, extending its use in certain areas, such as charitable activities, could improve resource allocation.

This module explains how the price mechanism functions to allocate resources in a market economy. It fulfills three main functions: rationing, incentive, and signaling. Rationing ensures that only consumers willing to pay the market price can purchase a product, helping to preserve stocks. Incentives are created through lower prices, which encourage consumers to increase their quantity demanded, and higher prices, which incentivize suppliers to maximize profits. Prices also serve as signals for buyers and sellers to make decisions about buying or selling a product. The video demonstrates these functions through a diagram showing a shift in the supply curve. However, there are problems with resource allocation through the price mechanism, such as externalities, merit and demerit goods, public goods, market imperfections, and inequality. Despite these issues, there is a suggestion to extend the price mechanism to improve resource allocation, particularly in charitable or voluntary activities. However, there are moral implications and evidence suggesting that introducing payment for donations may reduce participation. Additionally, elements of the price mechanism can be used in infrastructure projects and welfare support to increase efficiency.