The Price Mechanism Flashcards
1
Q
What is the price mechanism
A
The means by which decisions of customers and businesses interact to determine the allocation of resources
2
Q
What are the 3 functions of the price mechanism
A
Signalling
Rationing
Incentivising
3
Q
How does signalling work
A
When prices change,it sends a signal to producers that consumers want to buy more or less
4
Q
How does incentivising work
A
When prices change,from a profit standpoint,it can reduce or increase firms incentive to supply
5
Q
How does rationing work
A
Prices will increase to remove excess demand to decrease quantity demanded,this limits/rations a good or service
