price mechanism

Question 1

State three functions of the price mechanism

Answer 1

signalling, incentive, rationing

Question 2

define price mechanism

Answer 2

how prices allocate goods and services in a market based on levels of demand and supply

Question 3

Describe incentive function

Answer 3

higher prices allow firms to produce more goods/services and encourage increased production and sales by providing the incentive of increased profit

Question 4

Describe signalling function

Answer 4

changes in price show changes in supply and/or demand and act as a signal to producer
- a price increase is a signal to producers that demand is high, so this will encourage them to increase production

• prices help determine where and how resources should be distributed

Question 5

Describe rationing function

Answer 5

if there’s high demand for a good/service and its supply is limited, then the price will be high. Supply of the good will be restricted to those that can afford to pay a high price - they’ll have low price and many will be sold.

• Because of resources are finite and scarce not everyone is able to buy everything They want; when demand is greater than supply then price is a bid up so that the good or service is rationed out to those who can afford to pay

Question 6

Ref to LS16 page 33 in micro handout

Answer 6

explains price mechanism functions

Question 7

ref to pmt notes for price mechanism function local,national and global