How do Prices Allocate Resources

Been reading a book on econ. Talking about how prices show the most efficient way to allocate resources and such, which makes sense... but I don't get how prices would change. If the demand for a product goes up, so to should the price, from what the book's said so far. How will sellers know the demand's up? Keeping track of sales per unit of time comes to mind... but how do they know how much to rise it? Too much and you lose money, too little and you lose potential profit.

I'm not really sure how to word what's confusing me.... x.x

i see where you're coming from, it's a gamble really. You set it at a 'reasonable' price that you know consumers will more likely buy at. The seller's will know that the demand is up b/c they see that consumers are buying more & more of the product. Then they'll hike up the price a little bit, if it's too much then the consumer will obviously go to another seller for the same product. I think I'm making sense, no?

Trial and error?
Just raise it 10 cents, or something *thinking of stores like Target*, every week until sales drop?

Depending on the elastisity of the product though, higher prices would reduce sales, but still increase profit.... so would they just check weekly profit + margin of error statistics?

Focus groups and Market Research projects help the producer to see what the consumer demand is for a product. It can be as simple as asking someone on the street "how much would you pay for this" to having a complex scientific poll showing how well the product sells at different prices. If the product is being sold in different markets, they can play around with different prices to see which one maximizes profits.
In terms of an individual seller, they need to figure out whether their product is inelastic (able to have a price raise and still raise revenue) or elastic (loses revenue with price raise). All elastic and inelastic products share the same characteristics, so it should be easy to tell if a product is inelastic or elastic.

Oh, so there's an entire market for taking polls about sales & pricing and selling it to stores like Target and Walmart? o.x

sure is
i belong to some of them- as they are a great way of making some extra cash
they mainly deal with new products and focus groups surrounding making existing products better.
i still have all my notes from AP econ and i still remember -most- of the stuff from that class lol. Basically- in theory, your price should equal a certain aspect of cost (depending on what type of market you are in). So if u wanna know the answer on the econ tests, the price you set your product at should equal your marginal cost (heres where it gets fuzzy lol). So basically, it depends on what type of market you are in and how much competition is in the market.

Ohduh, my stats teacher was talking about people who pay you to take surveys about stuff. Way2connectA&B. ;-;

What do you mean a certain aspect of cost? What do you mean the 'type of market you are in'? What happens when competition is higher? More accuracy needed from surveys...?

Ok, so, the 'type of market' means the saturation of sellers in the market. There are 4 basic types of markets all have varying types of competition. They range from perfect competition (lots of competition) to monopoly (no competition). A firm in the perfectly competitive market would want to produce at the point where Marginal cost = marginal revenue (meaning the cost of making one more product = the revenue received from selling it). This means that they do not make a profit in the long run (sucks to be in a perfectly competitive market). So basically, this all goes back to the ideals of supply and demand. The more supply (in perfectly competitive market's case, extreme supply) the lower the price of the product.
It might be all confusing, and im prolly not helping lol, but its easier to understand with some explanation. The higher the competition = higher the supply, and thus lower the price. Theres all these formulas on where to place the price in each market (they are all based on the graphs of the firms themself). Price goes on the vertical axis, and # of products on the horizontal. on the graph you put on the marginal cost, the marginal revenue, and the total cost and total revenue curves. From there you trace to where marginal cost = marginal revenue (if ur perfectly competitive). It should look something like this: Example of Econ graph Thats not a perfectly competitive firm but its similar. In a perfectly competitve firm, there would be no profit (as shown by the area between C and P on the vertical axis).
*out of breath*
Ive prolly confused u more now