1.2.7 - Price Mechanism Flashcards
What is the price mechanism?
In the free market economy, The price mechanism allocates resources. Price is determined by the interactions of demand and supply, also determines how much is bought and sold and by whom.
Prices rise when buyers want to purchase more than suppliers want to sell, encouraging suppliers to make more profit.
What is the function of the price mechanism?
Incentive to firms: A higher price encourages and allows firms to produce more incentive to work harder. Sell more at a low price.
Signalling: Changes in prices show changes in supply and demand. Acts as signal to producers and consumer. Signal for how resources should be used. Changes in how much is bought and sold.
Rationing: Resources are scarce and they will run out if everyone could have them. Price scarces resources when demand outstrips supply, high demand resources, limited supply price is high. As price rises some people no longer able to afford to buy the product and others will not desire to buy the good.
What is Market failure?
Market failure occurs when signalling and incentive functions fail to operate optimally leading to a loss of economic and social welfare. Consumer preference for goods and services may be based of imperfect information on costs and benefits of a decision to buy and consume a product.
What are secondary markets?
Secondary markets occur when buyers and sellers are prepared to use second market to re-sell items that have already been purchased.
How do the Gov intervene in the market mechanism?
Incentive that consumers and producers have can be changed by gov intervention.
What are the inter relationship between markets?
All markets are inter-connected supply and demand analysis shows this.
