The Price Mechanism Flashcards
What is the price mechanism?
The manner in which the profits of goods or services affects the supply and demand of goods and services.
What are the three functions of the price mechanism?
1) Rationing.
2) Signalling.
3) Incentivising.
How does the rationing function work?
When there is a shortage of a product, prices will rise and deter some consumers from buying the product, reducing demand to meet the reduction in supply.
How does the signalling function work?
The rise and fall of prices demonstrate to firms where resources are required and reflects the scarcities and surpluses in the economy. E.g. if prices rose, this indicates that demand is rising, signalling to producers to expand production. Vice versa.
How does the incentivising function of the price mechanism work (2)?
1) Higher prices encourage and enable firms to produce more goods/services.
2) Lower prices encourage consumers to buy goods/services at a price lower than that of what they were usually willing to pay.
What is a commodity?
A raw material or primary agricultural product that can be bought and sold, e.g. copper, coffee and wheat.
What are the 5 key features of the agricultural market?
1) Agricultural products are commodities.
2) Supply of agricultural products is unpredictable, as it is heavily influenced by the weather.
3) The agricultural market is linked to seasonal unemployment - workers only required during harvest.
4) The long-run price of agricultural products is falling due to technological advancements.
5) Buffer stocks are used to affect the price of agricultural products - governments may use a buffer stock scheme to buy up excess supply to keep prices high and protect producers.
Why is oil so important?
It is used in the production of so many goods, as well as in transportation.
Who are OPEC?
The Organisation of Petroleum Exporting Countries - an organisation enabling the co-operation of leading oil-producing countries in order to collectively influence the global oil market and maximize profit.
What are the 4 key features of the oil market?
1) Demand for oil is closely linked to the business consumption and consumption.
2) Speculators can influence demand for oil, when trying to make a profit from a rise in price.
3) Supply-side shocks (e.g. a war in an oil producing country) can significantly affect oil prices.
4) The long-run supply of oil is affected by the world oil reserves and the cost of extracting oil.
What are the 6 key features of the housing market in the UK?
1) Houses are regarded as an investment, and an appreciation in housing prices creates wealth, boosting consumer confidence, resulting in greater consumption (the wealth effect).
2) A rise in demand for houses will create demand for complementary goods, such as furniture and home appliances.
3) Supply of new houses is affected by the price of labour, building materials and legal and planning costs.
4) The PED of houses is inelastic, as there are no close substitutes.
5) In the UK, there is a shortage of affordable housing.
6) A fall in house prices can result in negative equity - where the value of the house is lower than the value of the mortgage being paid by the owner.
