1.2.7

Question 1

What’s the price mechanism?

Answer 1

How decisions of consumers and businesses interact to determine the allocation of resources.

Question 2

What’s the signaling function?

Answer 2

Prices perform a signaling function – i.e. they adjust to demonstrate where resources are required.

Question 3

What’s the incentive function?

Answer 3

Through choices consumers send information to producers about their changing nature of needs and wants.

Question 4

What’s the rationing function?

Answer 4

Prices ration scarce resources when demand outstrips supply.