price determination and price mechanism

Question 1

what is equilibrium

Answer 1

when supply = demand

Question 2

what is the role of market forces

Answer 2

to remove excess supply or demand

Question 3

what is excess supply

Answer 3

supply greater than demand

Question 4

what is the price mechanism

Answer 4

allocates goods and services to get equilibrium

Question 5

three functions of price mechanism

Answer 5

incentive function
signalling function
rationing function

Question 6

incentive function meaning

Answer 6

higher prices incentivise firms to produce more goods as it will cause higher profits

Question 7

signalling function meaning

Answer 7

changes in price show changes in supply/demand and thus acts as a signal, e.g. high price signals that there is high demand

Question 8

rationing function meaning

Answer 8

if there is high demand and supply is limited, price will be high to ration the supply. works the other way too with low demand excess supply

Question 9

advantages of the price mechanism

Answer 9

efficient allocation of resources
no cost to regulate it or operate - its natural
prices are kept to their minimum and resources are used as efficiently as possible

Question 10

disadvantages of the price mechanism

Answer 10

inequality in wealth and income likely
under the provision of merit goods and overprovision of demerit goods as the equilibrium will not be at the socially optimum level