Price Mechanism (1.2.7) Flashcards

1
Q

What does Price Mechanism Mean?

A

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

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2
Q

What market would price mechanism be used in?

A

Free market economy

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3
Q

What are the three main functions of Price Mechanism?

A

Signaling
Rationing
Incentives

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4
Q

What is Price Signaling?

A

Acts as a signal where resources should be used. When Price rises, producers moves resources into manufacture of that product.

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5
Q

What is Price Rationing?

A

When there’s excess demand a business will increase their prices and their goods should be rationed to people who can afford them at a value that is the highest (pay the most)

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6
Q

What are Price Incentives?

A

Incentive for people to work hard as more money=more they are able to buy and so suppliers realise more they produce they more money they get. Low prices are an incentive to buy more of a good.

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7
Q

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

A

Increase their supply

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8
Q

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

A

Consume more goods and services

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9
Q

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

A

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

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