1.2.7 - price mechanism

Question 1

What problem does the price mechanism address?

Answer 1

It addresses the basic economic problem of allocating scarce resources.

Question 2

How are prices determined in the price mechanism?

Answer 2

Prices are determined by the interactions of demand and supply.

Question 3

What happens to prices when buyers want to purchase more than suppliers want to sell?

Answer 3

Prices rise, encouraging suppliers to sell more due to the profit motive.

Question 4

What is the role of ‘signalling’ in the price mechanism?

Answer 4

Price changes provide information to producers and consumers about market conditions, indicating when the quantity bought or sold should change and where resources should be allocated.

Question 5

What is the role of ‘incentives’ in the price mechanism?

Answer 5

Price changes incentivize producers to adjust their output to maximize profit, and influence consumers’ buying behavior.

Question 6

How do low prices act as an incentive?

Answer 6

Low prices encourage consumers to buy more of a good to maximise utility

Question 7

How do high prices act as an incentive?

Answer 7

High prices encourage suppliers to produce and sell more as anticipate profit

Question 8

What is ‘rationing’ in the price mechanism?

Answer 8

The price mechanism allows goods to be only provided to those who can afford them. It is a method where product shortages increase price and some consumers will be deterred from buying the product