Microeconomics deals with relative prices, i.e., the absolute price of item j relative to the price level or Pj/P. If the aggregate price level P is unchanging, this can be conveniently set equal to one, and thereby, the absolute price of any item becomes the relative price. When demand for an item goes up, its relative price goes up. A rise in the (relative) price is a signal to the firms to produce more of that product and vice versa. Based on these signals, the decisions of firms release resources, including labour, from the sectors that are shrinking to those that are growing.
