LS16 - Price Mechanism Flashcards
1
Q
What are the 3 functions of the price mechanism?
A
Signalling
Incentive
Rationing
2
Q
What is signalling?
A
Changes in price provide information to producers and consumers about changes in market conditions
3
Q
What is incentive?
A
Higher demand causes increase in price, encouraging firms to increase production
4
Q
What is rationing?
A
Low supply causes rise in price which deter some consumers from buying the product
5
Q
What happens if demand is price elastic?
A
Lower price = rise in revenue
Higher price = fall in revenue
6
Q
What happens when demand is price inelastic?
A
Lower price = fall in revenue Higher
Higher price = rise in revenue
