Functions

Question 1

What does the price mechanism determine ?

Answer 1

The market price

Question 2

How are resources allocated ?

Answer 2

Through the price mechanism in a free market economy

Question 3

What is solved through this price mechanism ?

Answer 3

The economic problem of scarce resources

Question 4

Where does price move the resources?

Answer 4

Where they are demanded or where there’s is a shortage , and removes resources from where there is a surplus

Question 5

What are the 3 main functions price mechanism uses to allocate resources ?

Answer 5

Rationing, incentive , signalling

Question 6

Rationing

Answer 6

When resources are scarce , price rises due to excess demand

Increase in price discourage demand and consequently rations resources

Question 7

Incentive

Answer 7

Encourages change in behaviour of a consumer or producer

Question 8

Signalling

Answer 8

Price acts as signal to consumers and new firms entering a market

Prices changes show where resources are needed in the market

High price signals firms to enter the market because it profitable

However encourages consumers to reduce demand and therefore leave the maket

This shifts demand and supply curves