Theme 1.2.7 The price mechanism (unit 13) Flashcards

1
Q

What is the price mechanism?

A

It is the way a market economy allocates resources between conflicting uses.

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2
Q

What is the rationing function?

A

It is when changes in price lead to more or less being produced, so increasing or limiting the quantity demanded by buyers.

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3
Q

What is the incentive function?

A

It is when changes in price encourage buyers and sellers to change the quantity they buy and sell. A rise in price encourages buyers to purchase less and sellers to produce more and visa versa.

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4
Q

What is the signalling function?

A

It is when changes in price give information to buyers and sellers which influence their decisions to buy and sell.

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