price mechanism Flashcards
definition
the use of market forces to allocate resources in order to solve the economic problem
3 main functions
incentive
signalling
rationing
what does the rationing function do
allocates scarse resources to those only most willing to pay
what does the incentive function do
send info to consumers and producers about their changing needs and wants. raising prices invcentivises firms to produce more since higher profit can be earned
what does the signalling function do
indicates changes in the volume of demand or supply
what is a free market economy
all resources are privately owned and allocated via the price mechanism and there is minimal government intervention
what is a command economy
where there is state ownership of resources and these are allocated by the government
mixed economy
some resources are owned and allocated by the private sector and some by the public sector e.g. uk and france
free market advantages
privately owned resources, self interest, efficient resource allocation, compeitition, innovation, product variation
free market disadvantages
monopolies, no government intervention, poor working conditions, unemployment
command economy advanatges
low/ no unemployment, equality, favours workers, owned by the government
command economy disadvantages
lack of competition, profit motivator only
when is there excess supply
when the price is above p1 (equilibrium)
when is there excess demand
when price is below p1 equilibrium and demand is greater than supply
