1.2.7 - the price mechanism

Question 1

What are the 3 functions of the market mechanism?

Answer 1

-rationing function
-signalling function
-incentive function

Question 2

What is the rationing function?

Answer 2

A shortage of a good causes an increase in price, rationing the available supply to those who are willing and able to pay the higher price

Question 3

What is the signalling function?

Answer 3

Rising prices signals to producers that there is excess demand

Question 4

What is the incentive function?

Answer 4

Higher prices increases profit margins, encouraging producers to increase quantity supplied, directing resources towards consumer demand.