Price Mechanisms

Question 1

What is a Free Market?

Answer 1

Any place where buyers meet suppliers to exchange goods and services, free from government intervention.

Question 2

What is equilibrium and disequilibrium?

Answer 2

Equilibrium is where demand is equal to supply (Allocative efficiency)
Disequilibrium is where demand doesn’t equal supply.

Question 3

What is Signalling?

Answer 3

If the price of a good changes, this signals to the customer or producer that they should change their level of consumption or production

Question 4

What is Incentivising?

Answer 4

Rising prices encourage firms to expand their level of output because of higher profits.

Question 5

What is Rationing?

Answer 5

Resources are scarce. The price of a good rations that good. This limits supply to those who are willing and able to pay for it