Price Mechanism Part

Question 1

What are the three functions of the price mechanism?

Answer 1

Signalling
Rationing
Incentivising

Question 2

What is the price mechanism

Answer 2

The interaction of supply and demand to determine prices.(invisible hand)

Question 3

What is disequilibrium

Answer 3

This is anywhere on the graph that is not equilibrium

Question 4

What is signalling ?

Answer 4

Lower prices Signal sent to producers that consumers want fewer goods(contraction in supply)
Higher prices signal to producers that consumers want more goods.(extension in supply)

Question 5

Incentivising ?

Answer 5

Higher prices means more profit , increasing incentive to sell more leading to extension in supply.
Lower prices reduce profits, reducing incentive to sell, leading to a contraction in supply.

Question 6

What is rationing ?

Answer 6

Higher prices limit or ration the quantity demanded by consumers.
Only those willing and able to pay these higher prices will be able to buy.