Explain how changes in prices allocate scarce resources in a market economy [12 marks]

The concept of 'scarce resources' refers to the basic economic theory that the market will consistently have insufficient resources to fulfill all of society's wants and needs. The price of a product in the market may increase if there is an increase in demand, indicating to suppliers that more of the product is required in the market. This will therefore encourage other producers to join the market at this higher price, causing scarce resources to be reallocated across the market. However, this increase in supply will result in a shift in the supply curve, causing the market price to fall again.The theory can be explained by the use of a supply and demand graph.