Resource allocation

Question 1

Price mechanism

Answer 1

System where the (free market) forces of demand supply determines prices, in other words, the way in which prices are determined. Can affect consumers and firms (buyers and sellers

Question 2

Function of prices

Answer 2

Signalling
Incentive
Rationing

Question 3

Signalling

Answer 3

Provides info that allows firms/consumers to respond to changing market conditions. E.g. If there is a shortage of goods, prices tend to increase (to discourage spending) and vice versa

Question 4

Incentive

Answer 4

Prices create incentives for people to alter their economic behaviour. E.G. If demands are high, firms can put up the price as they are profit maximisers

Question 5

Rationing

Answer 5

Refers to the allocation of scarce goods and resources. Rationing as a price function helps to remove any excess demand or supply to reach an equilibrium.