1.2.7 Price mechanism

Question 1

Price mechanism

Answer 1

A system that determines the scarce allocation of resources through the interaction of supply and demand.

Question 2

Signalling function

Answer 2

Prices send signals.
->When the market price of a good or service is high, it signals that there is a shortage of that good.

Question 3

Incentive function

Answer 3

Higher prices act as an incentive to raise output because suppliers stand to make a better profit.

Question 4

Ration function

Answer 4

Prices ration scarce products by signalling the relative scarcity of each good and service.
->High market prices limit how many people are willing and able to buy.