Price Mechanism

Question 1

Incentive function

Answer 1

When changes in price encourage buyers and sellers to change the quantity they buy and sell. A rise in price encourages buyers to purchase less and sellers to produce more

Question 2

Rationing function

Answer 2

When changes in price lead to more or less being produced, so increasing or limiting the quantity demanded by buyers

Question 3

Signalling function

Answer 3

When changes in price give information to buyers and sellers which influence their decisions to buy a nd sell