price mechanism

Question 1

Signalling function

Answer 1

prices can act as a signal to whether there are scarcities and surpluses and can signal where resources are required and where they are not

Question 2

Rationing function

Answer 2

prices can ration scarce resources by increasing or decreasing demand through willingness and ability to pay

Question 3

Incentive function

Answer 3

Prices incentivise firms to supply more or less goods and services

Question 4

Allocating function

Answer 4

prices can ultimately help to allocate scarce resources amongst competing uses