Price Mechanism (L16)

Question 1

3 functions of the price mechanism

Answer 1

Signalling function
Incentive function
Rationing function

Question 2

Signalling function

Answer 2

Price changes tell consumers and producers whether they should enter or leave a market.

Question 3

Incentive function

Answer 3

Incentive motivates a producer or consumer to change behaviour (higher prices= incentive for producers to supply more so they can increase revenue and profits).

Question 4

Rationing function

Answer 4

Ration scarce resources when demand > supply (when there’s a shortage, price goes up)

Question 5

Identify the function of the price mechanism:

Increase in demand, leads to increase in price encouraging firms to increase production

Answer 5

Incentive

Question 6

Identify the function of the price mechanism:

Shortage of a product, price rises so some consumers deter from buying product

Answer 6

Rationing

Question 7

Change in prices informs producers and consumers about changes in market conditions

Answer 7

Signalling

Question 8

When demand is price elastic, a decrease in price results in a ____ in total revenue

Answer 8

Rise

Question 9

When demand is price inelastic a decrease in price results in a _____ in total revenue

Answer 9

Decrease

Question 10

When demand is price elastic an increase in price results in a ____ in total revenue.

Answer 10

Fall

Question 11

When demand is price inelastic an increase in price results in a ____ in total revenue

Answer 11

Rise