1.2.7- Price Mechanism Flashcards
1
Q
What is the price mechanism?
A
A concept that uses the forces of supply and demand to allocate resources and determine prices in a free market economy
2
Q
What are the main functions of the price mechanism?
A
- Rationing
- Signalling
- Incentive
3
Q
Why is rationing a function?
A
When there are scarce resources, price increases due to excess of demand, which discourages demand
4
Q
Why is signalling a function?
A
A high price signals firms to enter the market as it’s profitable, but this reduces demand
5
Q
Why is incentive a function?
A
-Acts as an incentive to work hard as buyers want to earn more money to buy more, and suppliers want to supply more to make more money
-Low prices act as an incentive for consumers to buy more and suppliers to supply less
