Hayek's Price Theory

Hayek's Price Theory emphasizes that individual knowledge about local conditions—like supplies, preferences, and resources—is decentralized. Prices serve as signals, reflecting this dispersed information and coordinating economic activity without central planning. When the supply or demand for a good changes, its price adjusts accordingly, guiding producers and consumers to make efficient decisions. This dynamic process helps allocate resources optimally across an economy, ensuring that what is produced matches what people need and want, based on the collective, often implicit knowledge that individuals hold about their specific circumstances.