1.2.7 Price mechanism

Question 1

Functions of the price mechanism to allocate resources:
rationing

Answer 1

the price system is a way of rationing goods because when price increases some people will no longer be ale to afford to buy the product or have the desire to.

the limited resources can be rationed and allocated to the people who are able to afford them and those who value them most highly

Question 2

Functions of the price mechanism to allocate resources:
signalling

Answer 2

the price mechanism acts as a signal where resources should be used. when price rises, producers move resources into the manufacture of that product

the change in price indicates to suppliers and consumers that market conditions have changed so they should change the quantity bought and sold when price equilibrium moves, output equilibrium moves with it

Question 3

Functions of the price mechanism to allocate resources:
incentive

Answer 3

it acts as an incentive for people to work hard, buyers realise that the more money they have, the more products they can buy

suppliers realise that if they produce more goods they will make more money

low prices act as an incentive for consumers to buy more

high prices act as an incentive for producers to sell more

price mechanism encourages people to behave a certain way

Question 4

The price mechanism in the context of different types of markets, including local, national and global markets

Answer 4

local - coronavirus pandemic disrupted supply chains across the planet significantly, uk imports fell, this means fewer goods on supermarket shelves. demand for food is high but supply is low, so prices rises to ration off the excess demand so that only the consumers how value the food most highly buy them, example of rationing function

national - price of housing varies across the UK, as the population of London is relatively high compared to the rest of the uk. house prices will rise through the rationing function, to ration off excess demand and provide houses for those who value them the most

global - in 1973 due to geopolitical factors regarding America and the Middle East, OPEC proclaimed an oil embargo, this sky rocketed the price of oil across the planet, as oil was an invaluable resource to countries. the rationing function rationed off excess supply and those who valued oil the most paid the highest price