price mechanism and rationality

Question 1

what is price mechanism

Answer 1

the interaction of buyers and sellers on a free market which enables services and discounts to be allocated by price.

Question 2

explain the rationing function of price mechanism and its effect.

Answer 2

whenever resources are scarce , demand exceeds supply and prices are driven up.

the effect of price rise is to discourage dimand and preserve resources

Question 3

explain the signalling function of price mechanism and its effect.

Answer 3

price changes send contrasting messages to consumers and producers about whether to enter or leave the market.

rising prices = consumers withdraw
producers enter
AND VISE VERSA

Question 4

explain the incentive function of the price mechanism and its effect

Answer 4

high prices provide and incentive to existing producers to supply more because they provide the possibility for more revenue and increased profits

Question 5

explain rational decision making

Answer 5

we assume we make decisions to maximise welfare, based upon limited income

Question 6

why economic agents may not be rational.

Answer 6

1. the want for immediate satisfaction
2. limited capacity to calculate costs and benefits efficiently.
   3.outside influence
3. different decision in emotional/cold states.
4. habit

Question 7

define market failure

Answer 7

when price mechanism fails to allocate scarce resources effectively leading to social welfare loss

Question 8

define complete market failure

Answer 8

when the market failed to supply any product at all

Question 9

partial market failure

Answer 9

when the market functions but producers either the wrong quantity of a product or wrong price