1.3.4 Price Mehanism Flashcards
What does price mechanism determine
The market price
How does price mechanism solve scarcity
Price moves resources to where they are demanded/ shortage
What are the 3 price mechanisms to allocate resources
- Rationing
- Incentive
- Signalling
How does rationing allocate resources
The increase in price discourages demand & consequently rations resources
E.g. plane tickets might rise as seats are sold, because spaces are running out. This is a disincentive to some consumers to purchase the tickets, which rations the tickets
How does incentive allocate resources
Encourages a change in behaviour of a consumer/ producer
E.g. a high price would encourage firms to supply more to the market, because it is more profitable to do so
How does signalling allocate resources
The price acts as a signal to consumers/ new firms entering the market
A high price signals firms to enter the market because it is more profitable
What is a mass market
The largest group of consumers for a product
What is a niche market
A smaller market, where a specific product is focused on
