1.2.7 Price mechanism

Question 1

what is price mechanism?

what does it rely on

Answer 1

It uses the force of supply and demand to allocate resources and determine prices in a market economy.

it relies on interaction between buyers and sellers to determine the equilibrium price and quantity of goods and services.

Question 2

what are the main functions on price mechanism allocating resources name the abbrevation?

Answer 2

SIR
signalling incentives rationing

Question 3

what is signalling?

Answer 3

The price acts as a signal to consumers and new firms entering the market.
The price changes show where resources are needed in the market.

an eg high price may signal firms to enter market because it is more profitable.
However for consumers they will demand less of it

Question 4

what is incentive?

Answer 4

encourages a change in the behavior of a consumer or producer.

if price increases consumers will buy less as they will get less utility and satisfaction from higher prices.

if price is high producers will supply more

Question 5

what is rationing

Answer 5

higher prices serve to ration on scarce resources(applies only to excess demand)

For example, plane tickets might rise as seats are sold, because
spaces are running out. This is a disincentive to some consumers to purchase
the tickets, which rations the tickets.