Price Mechanism (1.2.7)

Question 1

What does Price Mechanism Mean?

Answer 1

This determines how resources are allocated in the economy. This determines prices. It has 3 main functions.

Question 2

What market would price mechanism be used in?

Answer 2

Free market economy

Question 3

What are the three main functions of Price Mechanism?

Answer 3

Signaling
Rationing
Incentives

Question 4

What is Price Signaling?

Answer 4

Increases price signals to reallocate resources or that there is more demand for a good which means they need to produce more.

Question 5

What is Price Rationing?

Answer 5

When there’s excess demand the price of a good or service begins to rise. This prices out certain consumers and helps it go back to equilibrium.

Question 6

What are Price Incentives?

Answer 6

Increased price encourages producers and consumers to change their behavior. Firms supply more hopes of more profit. Consumers reduce consumption or switch to cheaper substitute goods.

Question 7

If Demand Increases it shifts to the right signaling to producers to do what?

Answer 7

Increase their supply

Question 8

If supply Increases it shifts to the right signaling to consumers to do what?

Answer 8

Consume more goods and services

Question 9

What is a real life example of prime mechanism being disrupted?

Answer 9

-The coronavirus pandemic disrupted supply chains across the planet to stop the virus spreading