1.2.7 Price Mechanism ✅

Question 1

What is price mechanism?

Answer 1

Interaction of supply and demand in the free market which both determine price.

Question 2

What is rationing?

Answer 2

Price system rations/allocates goods to those who can afford or value it highest.
Price increase = some people can’t afford to buy (others may lose desire to buy).
Price decrease = more able to afford.

Question 3

Name all three functions in allocating resources?

Answer 3

Rationing, signalling, incentive

Question 4

what is the signalling function?

Answer 4

Price has information on market conditions. (Allows for better decisions).
Rising prices = signals shortages prompting consumers to preserve.
Lower prices = indicates over supply prompting consumers to buy less + producers to cut down.

Question 5

What is the incentive function?

Answer 5

Actions that follow price changes. (Prices provide incentives for producers to allocate efficient Lyansy ).
Price rise = suppliers realise that should produce more to make more money.
Prices lower = signals decreased demand

Question 6

What do market forces do?

Answer 6

Help bring the equilibrium price.

Question 7

What did Adam smith refer to these functions as?

Answer 7

“Mystery of the invisible hand”