Functions of the Price Mechanism

Question 1

RATIONING

Answer 1

• decrease in supply causes an increase in price, which forces some people out of the market
• increase in supply causes a decrease in price, bringing people into the market

Question 2

INCENTIVE

Answer 2

increase in profit because price increased but CoP stayed the same - entrepreneurs respond

Question 3

SIGNALLING

Answer 3

• if demand decreases, it sends a signal to suppliers to produce less
• if supply decreases, it sends a signal to consumers to buy less

Question 4

exchange rates

Answer 4

Strong Pound: Imports Cheaper, Exports Dearer

Weak Pound: Imports Dearer, Exports Cheaper