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