1.2.7 Price mechanism

Question 1

What does price mechanism refer to?

Answer 1

The price mechanism refers to the way price responds to a change in demand or supply for an input, so that a new equilibrium position is reached in a market.

Question 2

What are the 3 price mechanisms and their definitions:

Answer 2

Rationing: When there is a shortage, price will rise to deter some consumers from buying the product.
Incentive: Changes in price act as an incentive to producers to change their output level and improve their profits.
Signalling: Changes in price provides information to both producer and consumer about the changes in market conditions.