Price Mechanism Flashcards
1
Q
What is the Price Mechanism?
A
How prices allocate goods and services in a market based on levels of demand and supply
2
Q
What are the 3 functions of the Price Mechanism?
A
- Signalling Function
- Incentive Function
- Rationing Function
3
Q
What does the Signalling Function do?
A
- Signals to manufacturers what the market for the product is like
4
Q
What does the Incentive Function do?
A
- Incentivises production or lack of production for a certain product
5
Q
What does the Rationing Function do?
A
- Raises the price in order to deter consumers from buying the product
6
Q
When demand is price elastic what will a decrease in price lead to?
A
A rise in total revenue
7
Q
When demand is price inelastic what will a decrease in price leads to
A
A fall in total revenue
8
Q
When demand is price elastic an increase in price leads to
A
A fall in total revenue
9
Q
When demand is price inelastic an increase in price results in
A
A rise in total revenue
