price mechanism Flashcards
what is the price mechanism
a concept used to describe how the market allocates scarce resources amongst users
what is allocation
allocating scarce resources among competing uses
what is rationing
when prices serve to ration scarce resources when market demand outstrips supply
what is signalling
when market prices adjust to demonstrate where resources are required, and where they are not
what is incentives
e.g. when the price of a product rises, quantity supplied increases as businesses respond
what is the rationing function
when there is a shortage of a product, price will rise and deter some consumers from buying the product
what is the signalling function
changes in price provides information to both consumers and producers about changes in market conditions
