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. E.g price signal demand is higher. 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 scarce 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 the role of the price mechanism in terms of Local context?
Coronavirus distributed supply changes across the planet. Some British supermarkets stopped imports so fewer goods on supermarket shelves. Demand for food is high but supply is low, price of food rises to ration of excess demand only consumers who value food most will buy it, rationing function example
What is the role of the price mechanism in terms of National context?
Price of housing differs across the UK, Lower in the north and Higher in the south, Mainly because London is the capital and second largest financial centre in the world. Home to tourist attractions, Also relative high population compared to rest of the UK, house prices rise through rationing function, rationing off excess demand provide houses to those who value them. Incentivise firms to allocate resources to production of more houses there is profit to be made.
