Price Mechanism/ Elasticity Flashcards
What happens to excess demand and supply due to price mechanisms
Excess demand and excess supply are eliminated by the invisible hand which is also known as the price mechanism
What is the 3 functions of the price mechanism
Signalling
Act as an incentive device
Rationalising device
What is the first function of the price mechanism
It is signalling
If there is excess demand, signals would be sent to the producers, for example excessive queuing for a product
What is the second function of price mechanisms
It is to act as an incentive device
The producer will be incentivised to make more foods as they have been signalled that there is opportunity to make greater profits
What is the third function of price mechanisms
The role of a rationalising decide
E.g if you have metal going into making printers and toys, if toys demand increase less metal will go into printers and more into making toys
What is cross elasticity of demand
This is the responsiveness of demand for good B to a change in price of good A
What is the formula for cross elasticity
%change in demand for good B // %change in price of good A
If the price of a product what happens to the demand for it’s substitute and what does the graph look like
The demand for the substitute increases in the same direction, meaning the graph/ demand curve would be upwards sloping
If the price went up of one product what would happen to it’s complementary product
The demand would decrease
Showing a downward sloping demand curve
