price mechanism

Question 1

Allocation

Answer 1

Allocates scarce resources among competitors

Question 2

Rationing function

Answer 2

When demand increases only those willing to pay the increase price can (e.g rising costs of renting) - supply shifts left

Question 3

Signalling

Answer 3

Prices signal where resources are required - e.g if demand is rising this should signal suppliers to increase price. Or if coffee falls in price farmers should produce other products - prices signal future profitability.