A price signal is
information
Information is an abstract concept that refers to that which has the power to inform. At the most fundamental level information pertains to the interpretation of that which may be sensed. Any natural process that is not completely random, ...
conveyed to
consumer
A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. ...
s and
producer
Producer or producers may refer to:
Occupations
*Producer (agriculture), a farm operator
*A stakeholder of economic production
*Film producer, supervises the making of films
**Executive producer, contributes to a film's budget and usually does not ...
s, via the
price
A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in t ...
s offered or requested for, and the
amount requested or offered of a
product or service, which provides a signal to increase or decrease quantity supplied or quantity demanded. It also provides potential
business opportunities. When a certain kind of product is in shortage supply and the price rises, people will pay more attention to and produce this kind of product. The information carried by prices is an essential function in the fundamental coordination of an economic system, coordinating things such as what has to be produced, how to produce it and what resources to use in its production.
In
mainstream (neoclassical) economics, under
perfect competition relative prices signal to producers and consumers what
production or
consumption decisions will contribute to
allocative efficiency. According to
Friedrich Hayek
Friedrich August von Hayek ( , ; 8 May 189923 March 1992), often referred to by his initials F. A. Hayek, was an Austrian–British economist, legal theorist and philosopher who is best known for his defense of classical liberalism. Hayek ...
, in a system in which the knowledge of the relevant facts is d