What role do prices play in a market economy?

In a market economy, prices serve as vital signals that reflect the relationship between supply and demand. When prices change, they convey information about the scarcity of resources and the level of consumer demand for different goods and services. For example, if a particular product becomes scarce while demand remains high, the price will typically increase. This price increase signals to producers that they should allocate more resources to the production of that good, as there is an opportunity to earn more revenue. Conversely, if a product is in surplus and demand is low, prices will likely fall, signaling producers to reduce output or seek alternative uses for their resources.

This signaling function of prices ensures that resources are allocated efficiently within the economy, guiding both consumers and producers in their decision-making processes. Consumers rely on prices to make choices about what to purchase based on their needs and budget, while producers use price information to determine what to supply in the market. Thus, prices are essential in balancing the supply and demand, making option B the correct choice.