Prices are the automatic regulator

Question

“Prices are the automatic regulator that tends to keep production and consumption in line with each other.”  Explain.

Answer 1

When demand increases, prices rise.  This induces producers to increase the quantity supplied as they move up their supply curves toward the new (higher) equilibrium point. When demand decreases the same happens in reverse.

When supply increases, prices drop.  This stimulates buyers to raise the quantity demanded as they move down their demand curves toward the new (lower) equilibrium point.  The same happens in reverse when supply decreases.

In each case, it is the change in price caused by the change in demand or supply that brings about the change in quantity supplied (in the case of a change in demand) and a change in quantity demanded (in the case of a change in supply).  Thus, price is the automatic regulator that keeps production and consumption in line with each other.