Functions Of Price Mechanism Flashcards
1
Q
What is the signalling function?
A
As demand changes, it signals to suppliers to change their prices
2
Q
What is the rationing function?
A
Prices serve to ration scarce resources when demand is larger than supply - deter customers, etc
3
Q
What is the incentive function?
A
Low prices act as an incentive to buyers, they encourage them to buy more goods (e.g. high prices can also act as an incentive for new firms to join the market and increase supply)
