Functions Of The Price Mechanism

Question 1

Incentive Function

Answer 1

When changes up price encourage buyers and sellers to change the quantity they buy and sell. A rise in price encourages buyers to purchase less and sellers to produce more, and vice versa.

Question 2

Rationing Function

Answer 2

When changes in price lead to more or less being produced, so increasing or limiting the quantity demanded by buyers.

Question 3

Signalling Function

Answer 3

When changes in price give information to buyers and sellers that influence their decisions to buy and sell.