price mechanism Flashcards

1
Q

definition

A

the use of market forces to allocate resources in order to solve the economic problem

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2
Q

3 main functions

A

incentive
signalling
rationing

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3
Q

what does the rationing function do

A

allocates scarse resources to those only most willing to pay

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4
Q

what does the incentive function do

A

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

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5
Q

what does the signalling function do

A

indicates changes in the volume of demand or supply

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6
Q

what is a free market economy

A

all resources are privately owned and allocated via the price mechanism and there is minimal government intervention

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7
Q

what is a command economy

A

where there is state ownership of resources and these are allocated by the government

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8
Q

mixed economy

A

some resources are owned and allocated by the private sector and some by the public sector e.g. uk and france

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9
Q

free market advantages

A

privately owned resources, self interest, efficient resource allocation, compeitition, innovation, product variation

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10
Q

free market disadvantages

A

monopolies, no government intervention, poor working conditions, unemployment

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11
Q

command economy advanatges

A

low/ no unemployment, equality, favours workers, owned by the government

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12
Q

command economy disadvantages

A

lack of competition, profit motivator only

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13
Q

when is there excess supply

A

when the price is above p1 (equilibrium)

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14
Q

when is there excess demand

A

when price is below p1 equilibrium and demand is greater than supply

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15
Q
A
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