Price Mechanism (1.2.7) Flashcards
What does Price Mechanism Mean?
This determines how resources are allocated in the economy. This determines prices. It has 3 main functions.
What market would price mechanism be used in?
Free market economy
What are the three main functions of Price Mechanism?
Signaling
Rationing
Incentives
What is Price Signaling?
Acts as a signal where resources should be used. When Price rises, producers moves resources into manufacture of that product.
What is Price Rationing?
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)
What are Price Incentives?
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.
If Demand Increases it shifts to the right signaling to producers to do what?
Increase their supply
If supply Increases it shifts to the right signaling to consumers to do what?
Consume more goods and services
What is a real life example of prime mechanism being disrupted?
-The coronavirus pandemic disrupted supply chains across the planet to stop the virus spreading