Market Mechanism Flashcards
What is the market mechanism
The allocation of scare resources between competing uses
What does the market mechanism rely on
The interaction of demand, supply and the three functions or price, which coordinates decisions between buyers and sellers
What are the three functions of price
Signaling, rationing and incentives
How do signalling and incentives act as a function of price
The signalling function of price conveys information to buyers and sellers. The price also reflects the market conditions so also acts as a is signal to those in the market.
This information that is conveyed through the signalling incentives buyers and seller to act and affect resource allocation.
A new price signal has been given to consumers and the price of a good has increased what might this incentives them to do
If the ped is inelastic they would carry on buying the good and might cut back in other areas.
If the ped is elastic then they might switch to a substitute
How does the rationing function of price work
The price of the resource goes up and the market decides who the resource is allocated based on who is will to pay for it at the increased price.
What does Adam smith call the market mechanism
The ‘invisible hand’
