1.2.7 Price Mechanism Flashcards
What is the price mechanism
decisions taken by consumer + businesses interactions to determine allocation of scarce resources
What are the three functions of price mechanisms
Signalling
Incentives
Rationing
What is the signalling function
prices form an allocation where resources are supplied
- If prices rise - high demand = signal to expand production
- If excess market supply = prices mechanism will eliminate surplus causing prices to fall
What is the incentives function
Consumer choice sends information to producers about changing needs/wants
High prices = incentives to raise output
Weak demand = supply contracts
What is the rationing function
Prices ration scarce resources, when demand outstrips supply
For competitive markets to function efficiently
all agents of an economy must respond to appropriate price signals
Market failure occurs when
signalling and incentives functioning fail to operate optimally
What is a secondary market
Occurs when buyers and seller prepared to used a second market to re-sell items that have already been purchased
How can incentives that consumers and producer have be changed
By the government
How can incentives that consumers and producers have be changed by the government
Subsides
indirect taxations
imposing maximum and minimum prices
Why can sometimes incentives that consumers and producers that have be changed by the government not have the expect outcome
agents of the economy my not always respond to incentives in the manner which textbook economic suggests
What can supply and demand in markets, have to do with other markets
inter connections
how changes in demand/supply conditions in one market influence supply/demand in a related markets
E.g. demand for homes and supply of bricks
