Price mechanism Flashcards
How does a shift in demand change prices
Firms see high demand so they naturally increase prices
From P1-P2 signals that there has been excess demand and signal need for more resources , and incentivises firms to increase quantity to earn more profit
They ration scarce resources by reducing consumption to Q2 which is allocative efficient
( Draw out the diagram ) ) shift right of D1D2 Q1Q2
How does a shift in supply change prices ?
Excess supply causes increased stock levels - so prices fall to get rid of the excess stock
S1S2 increase - signals there has been an excess supply and the need for fewer resources , incentivises producers to reduce output to increase profits
Rations scarce resources by encouraging demand to Q2 which is allocative efficient
Draw diagram ( S1S2 right P1P2fall
