The price mechanism exists in a capitalist economy. Let's understand why this is the correct answer and how the price mechanism functions in such an economic system.

Capitalist Economy:
In a capitalist economy, the means of production and distribution are primarily owned and controlled by private individuals or entities. The market forces of supply and demand play a significant role in determining the allocation of resources and the prices of goods and services. The price mechanism is a fundamental feature of this economic system.

Price Mechanism:
The price mechanism refers to the way in which prices are determined in the market based on the interaction between supply and demand. It acts as a signaling and coordinating mechanism that helps in the efficient allocation of resources and the production of goods and services.

Market Equilibrium:
In a capitalist economy, the price mechanism works towards achieving market equilibrium, where the quantity demanded equals the quantity supplied for a particular good or service. This equilibrium price is determined at the point where the demand curve intersects with the supply curve.

Supply and Demand:
- Supply: The supply of a good or service represents the quantity that producers are willing and able to offer at various price levels. As the price of a good increases, producers are incentivized to increase the quantity supplied.
- Demand: The demand for a good or service represents the quantity that consumers are willing and able to purchase at various price levels. As the price of a good decreases, consumers are incentivized to increase the quantity demanded.

Determining Prices:
The price mechanism operates through the interaction of supply and demand:
1. If the demand for a good exceeds the supply, there is a shortage, and the price tends to rise.
2. If the supply of a good exceeds the demand, there is a surplus, and the price tends to fall.
3. When the quantity demanded equals the quantity supplied, the market is in equilibrium, and the price stabilizes.

Benefits of the Price Mechanism:
The price mechanism in a capitalist economy offers several advantages:
- Efficient Allocation: Prices help allocate resources to their most valued uses. Higher prices indicate scarcity and encourage producers to increase supply, while lower prices indicate abundance and discourage production.
- Incentives: Prices provide incentives for both producers and consumers. Higher prices incentivize producers to increase supply, while lower prices incentivize consumers to increase demand.
- Information: Prices serve as a signaling mechanism, providing information about market conditions, trends, and relative scarcity or abundance.
- Flexibility: Prices are flexible and can adjust quickly to changes in supply and demand, helping the economy respond to dynamic conditions.

Conclusion:
In conclusion, the price mechanism exists in a capitalist economy. It plays a crucial role in determining the allocation of resources and the prices of goods and services. By relying on the forces of supply and demand, the price mechanism helps achieve market equilibrium and promotes efficiency in resource allocation.