19) The price mechanism

Question 1

What are the 3 functions of the price mechanism?

Answer 1

1) Signalling (prices adjust via d or s to signal producers and consumers that they should allocate resources differently)
2) Incentivising (When D for a product rises, Qs increases as businesses respond to increased profit incentives)
3) Rationing (price rises ration scarce resources when market supply decreases, causing demand to outstrip supply)