Micro: 1.2.7 Price mechanism Flashcards
1
Q
What is the function of rationing in the price mechanism?
A
Rationing occurs when demand exceeds supply, leading to higher prices that limit the availability of goods/services to those who can afford them.
2
Q
What role does incentive play in the price mechanism?
A
An increase in product prices incentivizes firms to produce more of those products for higher profits, while falling prices may lead firms to reduce production.
3
Q
How does signaling function in the price mechanism?
A
When prices rise, it signals to producers that demand is high, prompting them to increase production.
4
Q
What overall purpose does the price mechanism serve?
A
The price mechanism helps determine how resources should be allocated based on demand and supply.
