8- Price mechanism Flashcards
1
Q
How is price determined in a market?
A
By interactions of supply and demand.
2
Q
3 functions of the price mechanism
A
- Rationing function
- Signalling function
- Incentive function
3
Q
Rationing function
A
When price increases, some people will no longer be able to afford the product so goods are rationed.
4
Q
Signalling function
A
- Signals where resources should be used.
- When price changes consumers and producers are indicated that market conditions have changed so they should change the quantity bought and sold.
5
Q
Incentive function
A
- Incentive to work hard.
- Low prices incentivise more consumption.
- High prices incentivise more production.
