Price Mechanism

Question 1

What does excess demand cause?

Answer 1

Price to rise

Question 2

When prices rise this:

Answer 2

1) Signals excess demand and need for more resources
2) Incentivises firms to increase output to increase profit
3) Rations scarce resources by decreasing consumption
4) Allocate resources efficiently at equilibrium

Question 3

What does excess supply create?

Answer 3

A surplus and need for prices to fall

Question 4

When prices fall this:

Answer 4

1) Signals excess supply and need for less resources
2) Incentivises firms to decrease output to increase profit
3) Ration resources by increasing consumption
4) Allocate resources efficiently at equilibrium