Price mechanism

Question 1

What is the price mechanism ?

Answer 1

the means by which millions of decisions taken by consumers and firms interact to determine the allocation of scarce resources between competing uses

Question 2

What are the 3 functions in a market ?

Answer 2

signalling
incentive
rationing

Question 3

What is the signalling function ?

Answer 3

price changes sending contrasting messages to consumers and producers about whether to enter or leave a market

Question 4

What do rising prices signal to consumers ?

Answer 4

to reduce demand or withdraw from a market completely

Question 5

What do rising prices signal to producers ?

Answer 5

to enter a market

Question 6

What do falling prices signal to consumers ?

Answer 6

to enter a market

Question 7

What do falling prices signal to producers ?

Answer 7

to leave a market

Question 8

What is the incentive function ?

Answer 8

higher prices incentivise existing producers to supply more because they provide the possibility of more revenue and increased profits

Question 9

What does the incentive function mean for consumers ?

Answer 9

they may think about value for money or better quality

Question 10

What is the rationing function ?

Answer 10

when resources are scarce and they drive up the demand and it exceeds supply and therefore prices increase

Question 11

What does the price rise in rationing function do ?

Answer 11

discourage demand and conserve resources

Question 12

What does greater scarcity mean for rationing function ?

Answer 12

higher prices and more resources rationed

Question 13

What is an example of the rationing function ?

Answer 13

the oil market
as oil runs out and demand is discouraged more oil is conserved that it would be at a lower price

Question 14

What is the rationing function associated with ?

Answer 14

contraction of demand along the demand curve

Question 15

What are the assumptions made ?

Answer 15

competition exists
consumers act rationally
Ceteris Paribus
no reference to income distribution

Question 16

Why does it matter that it is assumed they don’t need to reference income distribution ?

Answer 16

spending decisions are dominated by the very rich

Question 17

What is a mass market ?

Answer 17

the largest group of consumers for a product e.g. supermarkets

Question 18

What is a niche market ?

Answer 18

a smaller market where a specific product is focused on e.g. cosmetic dentistry

Question 19

What does the price mechanism do to markets ?

Answer 19

allocate resources to where they are needed and wanted

Question 20

Why is a niche market generally better at allocating resources to where consumers want them ?

Answer 20

they are closer to the consumer and can target them directly rather than generally making it more efficient to allocate resources

Question 21

What can lead to potential market growth ?

Answer 21

markets and economies are not static
some niche markets become mass markets
changing technology and creative destruction