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Prices allow markets to adjust quickly when major events such as wars and natural disasters interfere with the production or movement of goods, wreaking havoc on supply.

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To consumers, price signals the opportunity cost of a purchase. The opportunity cost of buying any product, remember, is the next best use for the money you spend.

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In a market-based economy, prices function as an incentive because they represent potential for profit.

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Prices convey information to producers as well. Prices tell producers what consumers want. Automobile manufacturers, for example, pay attention to which models and features sell at high prices and which need to be marked down in order to attract buyers.

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Just as changing prices motivate producers, prices in the form of wages and salaries motivate workers. The opportunity to earn a higher “price” can inspire people to enter the workforce or seek higher-paying jobs. On the other hand, low wages can act as disincentives for people to seek work.

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By throwing the gasoline market into disequilibrium, Hurricanes Katrina and Rita illustrated the key role that prices play in correcting both shortages and surpluses.Prices give markets the flexibility they need to reach equilibrium even under changing conditions.

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Perhaps the most important role of price in a market-based economy is to guide resources to their most efficient uses. Consider, for example, the market for dairy products, such as yogurt, ice cream, and cheese. The firms whose dairy products are in greatest demand will buy the most milk in order to make products to meet that demand.

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Or consider the earlier example of car manufacturers who use prices to decide which models to produce and in what quantities. These production decisions are, at bottom, decisions about how best to use limited resources.