Handout 9(The price mechanism)

Question 1

What are the 3 main functions?

Answer 1

• Signalling
• rationing
• incentive
• also some consider allocating to be one

Question 2

Explain the allocating function.

Answer 2

-allocates scarce resources amongst competing uses

Question 3

Explain the rationing function.

Answer 3

• Rationing prices serve to ration scarce resources when market demand outstrips supply
• where there is a shortage of a product price will rise thus it will deter some consumers

Question 4

Explain the signalling function.

Answer 4

• Prices adjust to demonstrate where resources are needed

- Changes in price provides producers and consumers with information about changes in the market