1.2.7Price mechanism

Question 1

Rationing

Answer 1

-Rationing mechanism to allocate scarce resources among competing uses
-When demand exceeds supply, prices rise to discourage some consumers from buying
-Ensures goods are allocated to those willing to pay the highest prices
-e.g. bottled water during a hurricane

Question 2

Incentivising

Answer 2

-Prices provide incentives for producers to allocate resources efficiently
-Higher prices indicate increased demand
-Motivates producers to produce more
-Low prices signal decreased demand
-Encourage producers to allocate resources to a more profitable use
-e.g. price of crude oil rises- encourages production to earn higher revenues

Question 3

Signalling

Answer 3

-Convey information about changing market conditions so consumers and producers can make informed decisions
-Raising prices may signal potential shortages, prompting consumers to conserve and producers to increase supply
-Falling prices may signal excess supply, prompting consumers to buy more and producers to decrease production

Question 4

Price mechanism in local markets

Answer 4

-Price determined by s+d
-Factors such as weather or local preferences can influence prices
-e.g. price of fresh produce may vary dependent on seasonal factors

Question 5

Price mechanism in national markets

Answer 5

-s+d
-National policies and regulations (tax, trade regs) can impact prices
-e.g. national housing market can be influenced by policies on interest rates and mortgage regulations

Question 6

Price mechanism in global markets

Answer 6

-Involve international trade
-Influenced by exchange rates, geopolitical events, global supply chains
-e.g. price of oil affects fuel prices globally