Economic Incentives (Micro)

Question 1

What is the rationing function

Answer 1

When there’s an increased demand or decreased supply it leads to a price rise

Question 2

How does the rationing function cause a price rise

Answer 2

Scarcity of a product, price rise leads to a reduction in demand, the more scarce a product the higher the price

Question 3

What is the incentive function

Answer 3

A consumer or producer is motivated to a course of action

Higher prices incentivise a producer to supply more to make higher profit

Question 4

What is the signalling function

Answer 4

Changing prices give a signal to consumers and producers as to whether to leave or enter a market