Price mechanism (Signalling,Incentivising,Rationing,Allocating) Flashcards
1
Q
What is signalled+ incentivised when prices rise ?
A
Signals excess demand and need for resources
Incentivises firms to increase output to profit
Helps allocate resources at equilibrium (allocative efficiency)
2
Q
Explain the Price mechanism diagram
A
People want goods at a higher level of quantity yet firms cannot supply it
They increase prices in order to fund more resources
This encourages firms to increase output as they can gain profit D1-D2
3
Q
What is signalled + Incentivised when prices fall ?
A
Signals excess supply / fewer resources needed in market
Incentivises producers to reduce output / sell excess stock to make profit
Lower prices ration scarce resources by encouraging more demand
4
Q
A
