price mechanism Flashcards
what is the method of price mechanism
the method by which prices for goods and services are achieved
Why does the rationing function occur
The rationing function occurs because increased demand or reduced supply of a product will lead to a price rise
why does the signalling function occur
The signalling function occurs because changing prices give a signal to consumers and producers as to whether to leave or enter a market
e.g. higher prices suggests that consumers should buy less
Why does the incentive function occur
The incentive function occurs because a consumer or producer is motivated to a course of action
e.g. higher prices will incentivise a producer to supply more of a good or service
Why do higher prices act as a motivator for producers to increase supply of a good or service
This is due to greater contribution per unit
i.e. the difference between selling price and variable cost
When does allocative efficiency occur
Allocative efficiency occurs where consumer satisfaction is maximised in the production of goods and services
When does productive efficiency occur
Productive efficiency occurs where no additional output can be produced from the factor inputs available at the lowest possible unit cost
When does economic efficiency occur
Economic efficiency occurs where we have allocative and productive efficiency at the same time
maximum amount of products are produced at their minimum cost whilst maximising their benefit to society.
