Functions of Price Mechanism

Question 1

How many functions of the price mechanism are there?

Answer 1

3

Question 2

What are the functions of the price mechanism?

Answer 2

1) Signalling function
2) Incentive function
3) Rationing function

Question 3

Define the signalling function of the price mechanism

Answer 3

Signalling Function- prices adjust demonstrating where resources needed & where not- provides info to consumers & producers about changes in market condition
- Price ⬆️ reflects scarcities & price ⬇️ reflects surpluses

• If prices ⬆️ due to ⬆️ demand- signals to producers to ⬆️ production
• If excess supply- price mechanism eliminates surplus- allows market price to ⬇️

Question 4

Define the rationing function of the price mechanism

Answer 4

Rationing Function- prices ration scarce resources when demand ⬆️ than supply
- When shortage of 🚘, price bid up- only those with willingness & ability to pay can purchase 🚘

Question 5

Define the incentive function of the price mechanism

Answer 5

Incentive Function- ⬆️ prices- incentive to ⬆️ output- supplier can make ⬆️ profit 💵
- When demand ⬇️, supply contracts as producers ⬇️ output