Price Mechanism Flashcards
1
Q
Price Mechanism & Functions of Price
A
In a free economy, resources are allocated through the price mechanism.
It has 3 functions: Rationing, Signalling, Incentivising
2
Q
Rationing
A
Allocates according to willingness and ability to pay
e.g. if demand is higher than supply price will increase until it reaches equilibrium
3
Q
Signalling
A
Acts as a signalling mechanism to both consumers and producers, both groups change their consumption and production depending on price changes
4
Q
Incentivising
A
Lower prices encourage consumers to buy more (maximise utility) & producers to produce more (maximise profits)
