1.2.7 - Price Mechanism

Question 1

What Is The Price Mechanism?
(2 Points)

Answer 1

~ The interaction of demand and supply in a free market.

~ This interaction determines prices which are the means by which scarce resources are allocated between competing wants and needs.

Question 2

What Are The Functions Of The Price Mechanism Between Buyers & Sellers?
(3 Points)

Answer 2

~ Rationing.

~ Signalling.

~ Incentive.

Question 3

Describe The Rationing Function Of The Price Mechanism
(4 Points)

Answer 3

~ Prices allocate (Ration) scarce resources.

~ When resources become scarcer, price for them rises.

~ Only those who can afford to pay for them will receive them.

~ If there is a surplus then prices will fall, more consumers can then afford them.

Question 4

Describe The Signalling Function Of The Price Mechanism

Answer 4

Prices provide information to producers and consumers, where resources are required and where they are not.

Question 5

Describe The Incentive Function Of The Price Mechanism
(2 Points)

Answer 5

~ When prices for goods and service rise, it incentivises people to reallocate resources from a less profitable market to a more profitable market in order to maximise their profits.

~ Falling prices incentivise reallocation of resources to new markets.

Question 6

What Did Adam Smith Refer To The Functions Of The Price Mechanism As?

Answer 6

The mystery invisible hand.

Question 7

What Is ARSI?
(4 Points)

Answer 7

~ Allocates scarce resources.

~ Rations excess demand / supply.

~ Signals that the price is too high or too low.

~ Incentives to change price and increase profit.