Topic 4 - Equilibrium And Price Mechanism Micro

Question 1

What is it called where supply and demand meet

Answer 1

Law of supply - The law of supply is the microeconomic law that states that, all other factors being equal. (As the price of a good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versa)

Question 2

Price mechanism

Answer 2

Rationing function - prices allocate limited supply
Incentive function - prices provide agents with incentives to alter their behaviour
Signalling function - prices signal information about a market

Question 3

How excess demand leads to rationing

Answer 3

Whenever resources are particularly scarce, demand exceeds supply and prices are driven up. The effect of such a price rise is to discourage demand, conserve resources and spread out their use over time. The greater the scarfity the higher the price and the more the resource is rationed.