6) The Role Of Prices In An Economy

Question 0

Name the three main function of prices in an economy

Answer 0

⚫️rationing function

⚫signalling function

⚫️incentive function

Question 1

What does price reflect

Answer 1

Scarcity of a good

Question 2

Describe rationing function

Answer 2

⚫️ if demand is greater than supply
➡️prices increases
➡️goods/services rationed out
➡️to those who can afford to pay

Question 3

Describe signalling function

Answer 3

⚫️determine where and how
➡️resources should be allocated

⚫️if prices increases
➡️sends message to produces
➡️demand is high
➡️should increase production

Question 4

Describe the incentive function

Answer 4

⚫️prices changes behaviour
➡️of consumers and producers

⚫️government put high taxes on cigarettes
➡️prices increase
➡️reduces the incentive of consumers to smoke

⚫️government use subsidies
➡️prices decrease
➡️so we consume more of it