Theme 1.2 - Function of Price Flashcards
1
Q
What are the 3 functions of price?
A
Acts as an incentive
Acts as a ration
Sends signals
2
Q
How does price act as an incentive?
A
When high, incentivises firms to produce more
When low, incentivises consumers to buy more
3
Q
How does price act as a ration?
A
Resources scarce, price rations by fixing a value to them
Supply restricted to those that are willing/able to pay
4
Q
How does price act as a signal?
A
Changes in price represent changes in supply/demand
Acts as a signal for producers + consumers
5
Q
Give 2 examples of price acting as a signal
A
High price => Supply is high
Low price => Supply is low
