2.7 Price Mechanism Flashcards
1
Q
What are the functions?
A
SIR-A
1) Signalling
2) Incentive
3) Rationing
-
4) Allocative
2
Q
What is the price mechanism?
A
Describes how the decisions of economic agents interact to determine the allocation of scarce resources (“Invisible hand”)
3
Q
What is the Signalling function?
A
Prices adjust to demonstrate where resources are needed
4
Q
What is the Incentive function?
A
Consumer choices send information to producers through prices
5
Q
What is the Rationing function?
A
Prices ration scarce resources when demand > supply
6
Q
Effect of govt intervention?
A
- Distorts price mechanism
- Subsidies & indirect taxation
- Law of unintended consequences
